Retailers must keep up-to-date financial records because they are mandated to monitor and calculate their cost of goods. These duties, albeit challenging, are necessary for regulatory compliance across the world. Read on to discover the benefits and drawbacks of retail accounting, how to determine the cost of inventory, keep track of inventory levels, and other best accounting practices.
Accounting Information For Retail Businesses
Retail accounting is a particular kind of inventory valuation frequently employed by millions of businesses.
As a result, the phrase "retail accounting" is a little deceptive because it refers to an inventory management method rather than an accounting technique.
In retail accounting, you estimate your inventory's value rather than manually calculate it.
You also make the assumption that all units of the same item will have the exact pricing, price changes, and price change rates.
Estimating allows for faster computations that do not require actual inventory counts and that approximate the amount of cash in your company's inventory.
Retail Accounting's Benefits And Drawbacks
Advantages of retail accounting:
- Convenience: Your actual inventory is less critical in retail accounting than your understanding of your products' retail prices.
This is especially valuable if you manage many outlets because it will save you time when performing a physical inventory check.
- Simple calculations: Calculating the value of your inventory is easy since the retail accounting technique works on the premise that all units of one item are priced the same and go through the same price changes.
Using this simplified formula also makes creating financial statements much simpler.
- Cost savings: You won't need to perform manual inventory counts as regularly, but they are still crucial.
Manual counts require you either to keep your storefront closed while your personnel checks your inventory or pay them extra for taking inventory after hours, so without such need, you can reduce your expenditures.
Disadvantages of retail accounting:
- When prices change, there might be inaccuracies: Retail accounting can be unreliable if the prices of your products fluctuate often. This is because frequent price fluctuations cast doubt on the core tenet of retail accounting:
The pricing, price changes, and price change rates for all units of a single item are the same.
- Estimates as opposed to precise figures: Retail accounting only estimates the worth of your inventory since it makes irrational price assumptions.
Therefore, retail accounting is unlikely to fulfill your demands if you want precise pricing values.
- Inefficiency while using discounts: Retail accounting can quickly become erroneous when you conduct promotions because it expects a steady markup.
- Figuring out the cost of inventory: You must check the price of the products you sell and the dollar amount of the inventory you still have on hand in order to maintain track of your income and profit.
There are several ways to determine expenses. When it comes time to file your taxes, you'll need to know which technique you used, so be sure to keep note of it.
Remember that you must use the same accounting technique for your company from year to year.
Read more in detail about Accoutning in e-Commerce
Inventory: The Retail Approach
You can determine the cost of products sold and the cost of your ending inventory using the more straightforward retail technique, depending on the kind of inventory you sell.
Suppose you sell goods with a steady markup. In that case, you may split the expenses of acquisition and initial inventory by the cost-to-retail ratio, which is calculated by dividing the product's cost by the price you're asking for.
The ending inventory total may be calculated by taking this amount, multiplying it by the percentage of sales, and subtracting it from the cost of products sold.
Automate Your Accounting
If you lack experience, accounting may be a time-consuming and challenging task. Thankfully, accounting can be outsourced, hired as in-house staff, or performed independently—look into accounting software, like Wafeq, if you wish to do it yourself.
Accounting software monitors your whole financial situation, including purchase and sales orders, invoices, accounts receivable, and accounts payable.
You can complete vital financial records like income statements, balance sheets, and cash flow statements with the aid of Wafeq, the best accounting software.
Accounting software frequently improves accuracy and can be a valuable tool for information organization—if you’d like to see one of the leading solutions, check out Wafeq today.
One of your retail business's top tasks ought to be keeping track of your accounting. This can be more difficult because of your inventory, but choosing the right way to calculate your cost of goods sold and keeping track of it can help.
Use crucial financial papers, including cash flow statements, balance sheets, and income statements, whenever possible.