Accounting is essential to any retail company. It enables us to determine where we spend the most money, and how to reduce expenses. And the most effective ways to allocate financial resources to various departments like marketing, order processing, inventory control, and more.
The fact that the majority of us are overwhelmed by it but still have to cope with it is a very different issue.
This guide has been created to greatly simplify the process so that you are aware of everything you need to know. An introduction to retail accounting is given first. Next, we go through some important terms before giving you a step-by-step explanation of how to set up accounts for your retail store.
Retail Accounting Method
A little bit of a misconception is the term “retail accounting”. Retail accounting is a common inventory valuation technique used by retailers rather than a unique accounting procedure or system. Inventory is valued using the selling price instead of the purchase price, a practice that varies from “cost accounting” for inventory.
More on this shortly, but first, it’s critical to comprehend how crucial it is to understand the inventory cost in your retail operation.
Why Retail Accounting Is Different
Inventory tracking is not necessary when accounting for other enterprises. The taxes and laws that apply to retail accounting are special. Retail accounting differs in a several areas, including the following:
- Costs associated with inventory have a direct impact.
- There are sales tax computations.
- Payroll management should be considered.
- Retailers typically complete, or aim to complete, several orders each day. It can be overwhelming to see how many orders there are in one accounting cycle!
Therefore, to create a thorough overview of the condition of your retail firm, retail accounting integrates good financial knowledge with inventory tracking. Let’s explore retail accounting by going through the fundamentals of what your financial statements entail.
Retail Accounting: Advantages & Disadvantages
Using the retail method of inventory accounting has both advantages and disadvantages. The simplicity of the calculation is the retail method’s main benefit. The retail approach requires only a few numbers to determine your inventory cost, and it doesn’t require a physical inventory count to estimate your final inventory value.
Advantages
Tax implications of inventory costing:
- According to the IRS, you can value your inventory at whatever you like for tax purposes. The problem is that once you decide on a method, you must stick with it unless the IRS permits you to switch your costing method. This regulation was set up to prevent business owners from constantly switching costing methods to maximize their tax benefits.
- The inventory costing approach, which will provide you with the most accurate inventory valuation, should be used for tax purposes. Although you can use the retail method for tax purposes, you should probably use a different method to make sure you are reporting the most accurate data, such as a weighted average.
- Consult with your accountant before deciding which inventory costing method to use for your taxes. They will be able to help you with the costing approach that will work best for your company.
Disadvantages
However, the retail method has some disadvantages:
- The retail accounting system functions properly only if all products are marked up consistently. Different items are marked up at different percentages by many stores. Even if you could apply an average markup in this situation, your estimate would become less accurate.
- This approach is merely an estimation. You will still need to perform a physical inventory count at least once a year to determine the exact value of your inventory, even though it can give you a good notion of it periodically.
- Your calculation will be accurate even if your company changes its markup percentages. In other words, you won’t be able to use your markup percentage to determine the worth of your inventory in the current period if you run a sale after your last physical inventory count.
An In-Depth Retail Accounting Method:
Consider that your retail store sells cotton and sewing supplies. The cost of each type of fiber varies, and some sewing needles are more expensive than others. But because you decided to employ a keystone markup method, you are aware that every item, regardless of its nature, carries a 50% profit margin.
Imagine for a moment that you conducted a physical inventory count at the start of the quarter and were aware that the actual cost of your inventory on that day was 80,000. You check the records from your point-of-sale system and discover that your sales reached 30,000 at the end of the quarter. Finally, you spent a total of 10,000 on new fabric and supplies throughout the rest of the quarter.
The final value of your inventory can be calculated using the retail method with the following information:
Opening Stock: 80,000 (at cost)
Newest inventory: 10,000 (at cost).
Total Inventory Sold: 90,000 (at cost)
Total sales (at retail) during the quarter: 30,000.
Less – Cost of goods sold (30,000 multiplied by 50%) =15,000.
Cost of goods sold: 15,000
Total Inventory for Sale (at Cost) – Cost of goods sold = Final Inventory Value
90,000 – 15,000 = 75,000
You can probably assume that your inventory was worth 7,000 at the quarter end.
What is the keystone markup method?
The term “keystone markup” or “keystone pricing” describes the practice of marking up products twice their cost or wholesale price. In other words, a keystone markup happens when the gross margin equals the cost price in total. As an alternative, the markup is set at 50% of the selling price. Keystone markups apply to any goods that a store, for instance, sells for twice what it paid for them.
The markup is the difference between the wholesale price you paid for something and the final selling price (retail price).
Keystone markup is the practice of setting a product’s retail price at 250 even when its cost is 125. Additionally, the product has a gross margin of 150.
Conclusion
One of your retail business’s top priorities ought to be keeping track of your accounting. Because of your inventory, this may be more difficult, but choosing the right method to calculate your cost of goods sold and keeping track of it on an as-needed or continuous basis will help. Use crucial financial papers, including cash flow statements, balance sheets, and income statements, whenever possible. Accounting software may help you keep track of your funds and streamline the accounting process.
