Shrinkage definition including break down of areas in the definition. Analyzing the definition of key term often provides more insight about concepts. Shrinkage can be defined as: Inventory losses that occur as a result of theft or deterioration. Shrinkage is the reduction of inventory that is not due to the sale of inventory. Shrinkage could be the result of theft, loss, or spoilage. In a perpetual inventory system companies will still need a physical count of inventory do determine shrinkage. In a periodic inventory system shrinkage can be more difficult to determine. Estimates of what the physical inventory should be can be used to estimate the level of shrinkage.
