Retail Accounting
"Retail Accounting" is a method of accounting to account for inventory using retail prices only for sales, purchases, beginning inventory, and ending inventory.
EXAMPLE OF RETAIL ACCOUNTING
HOW RETAIL ACCOUNTING DETECTS THEFT
LIMITATIONS OF RETAIL ACCOUNTING
WHICH METHOD IS ACCURATE?
CONCLUSION
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Sales at Retail
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$12,000
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Beginning Inventory at Retail
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$ 3,000
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Purchases
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$11,000
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Invoice is for $8,250 but this figure is not used. Instead, the merchandise is "priced out" at retail. |
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Ending Inventory at Retail
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$ 2,000
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Cost-of-Goods-Sold at Retail
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$12,000
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$3,000 beginning inventory + $11,000 purchases at retail - $2,000 ending inventory at retail = $12,000 |
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No loss
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$ 0
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The $12,000 in sales matches the $12,000 retail COGS. Since the retail COGS is not greater than the sales, then there has been no shoplifting or pilferage. |
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Sales at Retail
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$12,000
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Beginning Inventory at Retail
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$ 3,000
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Purchases
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$11,000
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Invoice is for $8,250 but this figure is not used. Instead, the merchandise is "priced out" at retail. |
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Ending Inventory at Retail
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$ 1,500
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Cost-of-Goods-Sold at Retail
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$12,500
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$3,000 beginning inventory + $11,000 purchases at retail - $1,500 ending inventory at retail = $12,500 |
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Now there is a loss
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-500
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The $12,000 in sales is short of the $12,500 retail COGS. Therefore, $500 at retail is missing. |
- Advocates of retail accounting are usually astonished to hear that there is a limitation.
- Look at the EXAMPLE OF RETAIL ACCOUNTING above.
- What is the gross profit of the sales?
- While retail accounting may be useful for certain management programs, it is inadequate for and is not a substitute for proper cost-of-goods-sold accounting.
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Sales at Retail
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$12,000
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Beginning Inventory at Retail multiplied by 75%
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$ 2,250
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Purchases
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$ 8,250
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Invoice is for $8,250 but the merchandise is "priced out" at retail. We want the "true" cost, which is $8,250 |
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Ending Inventory at Retail multiplied by 75%
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$ 1,125
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We presume that the gross profit percentage should be 25%. |
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Cost-of-Goods-Sold at Retail
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$9,375
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$2,250 true beginning inventory + $8,250 purchases at true cost - $1,125 true ending inventory at retail = $9,375 |
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Now there is a net profit
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$2,625
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- Both methods are estimates.
- Neither is truly accurate.
- Each uses estimates but at different points.
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Retail Accounting |
True Cost Accounting |
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Sales |
accurate |
accurate |
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Beginning and ending inventory |
accurate |
estimated |
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Purchases |
estimated |
accurate |
- Retail Accounting is neither superior nor inferior to true cost accounting.
- The retail accounting model fits well into management tools accounting for inventory.
- Retail accounting is inadequate to properly reflect the true cost of goods sold for general accounting and tax purposes.
- Use retail accounting as a management tool.
- Use true cost accounting as an accounting tool.