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To journalize the adjusting entry for the inventory shrinkage for Castle Furnishings Company as of November 30, 2019, follow these steps:

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### **Step 1: Determine the inventory shrinkage amount**
The inventory shrinkage is the difference between the inventory that should be on hand (as per perpetual records) and the physical inventory actually on hand.

- Inventory per perpetual records: **$675,400**
- Physical inventory: **$663,800**

**Inventory shrinkage = $675,400 - $663,800 = $11,600**

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### **Step 2: Journalizing the Adjusting Entry**
Inventory shrinkage is recorded as an adjusting entry by debiting an expense account and crediting the inventory account to reflect the loss of merchandise.

1. **Debit**: **Cost of Goods Sold (COGS)** for the amount of the shrinkage ($11,600).  
   This reflects the loss in inventory value as an expense.

2. **Credit**: **Merchandise Inventory** for the amount of the shrinkage ($11,600).  
   This reduces the recorded inventory to match the actual physical inventory.

The adjusting journal entry would look like this:

**Journal Entry:**
| Date       | Account               | Debit       | Credit      |
|------------|-----------------------|-------------|-------------|
| Nov. 30    | Cost of Goods Sold    | $11,600     |             |
|            | Merchandise Inventory |             | $11,600     |

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### **Explanation:**
- **Cost of Goods Sold** is increased because the shrinkage represents a cost incurred due to loss or theft.
- **Merchandise Inventory** is decreased to reflect the actual value of inventory on hand after the shrinkage.

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Let me know if you need further explanation! Here are five related questions to expand your understanding:

1. Why is inventory shrinkage considered a normal expense in this scenario?
2. What internal controls could Castle Furnishings use to prevent inventory shrinkage in the future?
3. How would the journal entry differ if the shrinkage were deemed abnormal?
4. How does inventory shrinkage affect the financial statements?
5. What other accounts might be impacted if the inventory shrinkage was due to theft or fraud?

**Tip:** Regularly reconciling physical inventory with perpetual records helps catch discrepancies early and prevent significant shrinkage losses.

Learn how to record the adjusting journal entry for inventory shrinkage at Castle Furnishings. Understand the step-by-step calculation and the final journal entry, including the debit to Cost of Goods Sold and credit to Merchandise Inventory for $11,600. Suitable for undergraduate accounting students.

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