Retail businesses of all sizes have some unique challenges when it comes to accounting. They must factor in numerous variables to achieve an accurate picture of the state of their current business. If you are facing the challenge of keeping track of your unsold inventory and want a reliable way of estimating its worth, the retail method should be of interest to you. Continue reading to find out what the retail method is, what are its pros and cons, and how best to implement it into your business accounting strategies.
What Is Retail in Accounting?
The term “retail accounting” refers to a specific method used to manage your inventory in a retail setting. It is a technique used by retailers to keep a more accurate estimation of their current unsold inventory. Maintaining inventory is typically one of the largest expenses for a business, but since your inventory is considered an asset in accounting, it does not show as an expense until it is sold. This can be confusing when trying to track the current value of your inventory. This is where the retail method of accounting comes into play.
What Is the Retail Method?
The retail method factors in the cost of the inventory, retail markup, and sales to estimate the total worth of your current inventory on hand. By subtracting the total amount of sales from the beginning inventory and then multiplying that amount by the cost-to-retail ratio, you will arrive at an estimated worth of all unsold inventory. The retail method will only produce an estimated total since you will not be able to factor in any items that were damaged, lost, or stolen.
Retail Accounting Advantages and Disadvantages
The retail method has several advantages and disadvantages you should consider before deciding if it is the right fit for your business.
- Less physical inventory counting: You will be able to come to an estimated value of your inventory so you will not need to do as much physical counting of inventory. This is especially beneficial for businesses with multiple storefronts.
- Reduced downtime: Taking physical inventory may require you to close your business or take an employee away from his day-to-day duties. The retail method allows for less downtime for your business by giving you a total value with just a few calculations.
- Simple process: Calculating the worth of your inventory is a straightforward process and fairly simple to figure out. This means you can quickly get a total value making it easier to prepare financial statements or share your estimation with others involved in the business.
- You only get an estimate: Due to the nature of physical merchandise getting damaged, lost, or stolen, this method only gives you an estimated value. If you require an exact number, you will still need to do a physical count of merchandise.
- All items must be marked-up the same: One factor of this accounting method is the cost-to-retail ratio which means that percentage must be the same for all items you are inventorying. If you mark some things up 20% and others 50%, this method will not work.
- Sales and discounts cause inaccuracies: Most retail stores run sales or discounts on items throughout the year. If you adjust the price on some items, this will affect the total number in your accounting calculations. This will result in the value of goods not being wholly accurate.
Why Outsourcing Could Be the Best Solution
Calculating your company’s worth along with trying to run the day-to-day business can be overwhelming at times. Accounting can be a tricky process but one that is vital to the success of your business. Outsourcing your accounting gives you a team of professionals that will do all they can to keep your books in order and help to shape your business strategies to improve your bottom line.
Contact Pacific Accounting & Business Services today to learn more.