Understanding the Retail Inventory Method of Accounting
The retail inventory method of accounting is a way of estimating the cost of goods sold and the value of merchandise on hand for retail businesses. It is a method of inventory valuation that uses the cost of goods sold (COGS) to estimate the cost of ending inventory. This method is often used by retailers since it is a fairly simple and cost-effective way to track inventory.
How the Retail Inventory Method Works
The retail inventory method works by taking the beginning inventory of the period, adding in any purchases made, and subtracting any sales from that. The COGS is then calculated by taking the cost of the beginning inventory and adding in the cost of the purchases minus any markups or markdowns. This results in an estimate of the COGS for the period.
Benefits of the Retail Inventory Method
The retail inventory method has several benefits for retailers:
- It is a relatively simple method that is easy to understand and use.
- It can be used to estimate the value of inventory in a timely manner.
- It is a cost-effective way to track inventory.
- It is easy to update and adjust as new information becomes available.
Examples of the Retail Inventory Method
Let’s look at an example of how the retail inventory method works. Say a retailer has a beginning inventory of $10,000 and purchases $15,000 worth of merchandise during the period. The retailer then sells $25,000 worth of merchandise during the period. The COGS for the period is calculated as follows:
- Beginning inventory: $10,000
- Purchases: +$15,000
- Sales: -$25,000
- COGS: $0
The value of the ending inventory is then calculated by subtracting the COGS from the total inventory purchases:
- Inventory Purchases: $15,000
- COGS: -$0
- Ending Inventory: $15,000
Conclusion
The retail inventory method is a simple and cost-effective way to estimate the value of inventory for retail businesses. It is easy to understand and use, and allows for timely updates as new information becomes available. For further information, please refer to the following resources: