Which term describes the unaccounted-for reduction in a company's inventory resulting from error or theft?

• A. Defalcation
• B. Shrinkage
• C. Depreciation
• D. Shortness

Answer: (B)

Shrinkage describes the unaccounted-for drop in inventory from what is recorded to what is actually on hand. It captures losses caused by theft, counting or data-entry errors, damage, spoilage, or supplier fraud that create a discrepancy in inventory. This makes it the correct term for describing that gap. Depreciation applies to long-term assets like equipment and buildings, reducing their book value over time, not inventory. Defalcation refers to embezzlement of cash rather than inventory quantities. Shortness isn’t the standard term used for this concept; shrinkage is the established term in inventory control.