Retail Accounting Basics: Understanding the Retail Inventory Method

Markups represent the increase in the selling price of goods above their original cost, helping retailers achieve desired profit margins. For example, if a retailer purchases an item for $50 and sells it for $75, the markup is $25, or 50%. Markups must comply with accounting standards like GAAP, which require accurate reporting of revenue and inventory values. Retailers also need to consider market conditions, competitive pricing, and consumer demand when setting markups. Strategic management of markups ensures profitability while maintaining compliance with financial reporting requirements.

Better visibility into stock value

Using the retail method of accounting, retailers use the projected retail cost to value the inventory. Using the retail inventory method to calculate stock you have in a warehouse saves you the hassle of going to the warehouse to count it (or spending money to have the warehouse employees count it). Also, the cost of merchandise in your warehouse is usually consistent—there are no sales or price cuts like you have in-store—which leads to more accurate results with the RIM calculation. It measures the cost of your inventory in relation to the retail price of the products and uses the cost-to-retail ratio. Another thing to note about the retail inventory method is that it’s a simple, cost-effective strategy for inventory management. In practically no time, this method tells you the number of products you have left compared to what’s already been sold.

Cost of sales

Markup and markdown cancellations occur when previously applied price changes are reversed. For example, if a $20 markdown on a $100 item is canceled, the item returns to its original price, affecting the retail value of inventory. These adjustments must be accurately recorded to maintain the integrity of financial statements. Accounting standards like GAAP require that cancellations be reflected in the financial period in which they occur. Retailers should use robust tracking systems to manage these cancellations effectively, ensuring transparency and compliance in financial reporting.

• For example, if a retailer purchases an item for $50 and sells it for $75, the markup is $25, or 50%.
• It offers tools for product listing, inventory tracking, order management, and payment processing across multiple sales channels.
• While retail accounting isn’t a separate discipline of accounting, the difference is that there’s a greater focus on inventory, which we’ll explain in this guide.
• Businesses with diverse inventory and frequent price changes often find this method beneficial for estimating inventory values efficiently.

Best retail inventory management software 2025 review

And these inaccurate results can lead to poor forecasting for your business (meaning stockout or dead stock situations). The retail inventory method definitely has its advantages, but there are also some obvious drawbacks. It’ll be important for you to weigh the good with the bad as you decide whether this approach is right for your business. The main reason retailers use LIFO (instead of FIFO) is to adapt during times of rising prices. Some brands find LIFO beneficial when this happens because it can save on taxes and better match their revenue to the latest costs (even while prices are increasing).

Benefits of retail inventory management software

Many platforms sync inventory across POS, ERP, and e-commerce systems, ensuring a single source of truth for teams managing multi-store or omnichannel operations. While retail accounting isn’t a separate discipline of accounting, the difference is that there’s a greater focus on inventory, which we’ll explain in this guide. Key features include dynamic updates, which recalculate the average cost per unit after each transaction.

Use HashMicro’s Retail Accounting Software to Optimize your Inventory Cost

Retail inventory management software is a digital system that helps businesses monitor stock levels, product movement, orders, and sales in real time. It automates routine tasks like stock counts, low-inventory alerts, reorder point tracking, and purchase order generation, reducing the manual effort required to keep inventory aligned with demand. The retail inventory method is used by retailers that resell merchandise to estimate their ending inventory balances. This method is based on the relationship between the cost of merchandise and its retail price. The method is not entirely accurate, and so should be periodically supplemented by a physical inventory count. Its results are not adequate for the year-end financial statements, for which a high level of inventory record accuracy is needed.

Dependence on accurate record-keeping 🔗

• The central point of this method is estimating the retailer’s ending inventory balances.
• You can preserve optimal inventory levels by ordering only what you need to meet demand.
• By subtracting the net sales from this figure, the remaining retail value of the inventory is $150,000.
• Because your older inventory has already been sold and shipped out, your newer products remain on your warehouse shelves.
• With this insight, you can understand sales performance, better manage costs, know when to reorder inventory, and more.

The platform also supports lot tracking, barcode scanning, and real-time inventory updates. Brightpearl by Sage automates retail inventory, order management, and accounting workflows. It supports high-volume commerce across multiple sales channels, warehouses, and fulfillment models. Cube is a cloud-based FP&A platform that helps companies hit their numbers without having to sacrifice their spreadsheets. The platform consolidates data from ERPs, inventory systems, and spreadsheets into a single model, making it easier to plan for supply chain changes, headcount needs, or SKU-level margin shifts. Users can run multi-scenario plans and what-if analyses to understand how pricing, demand, or costs will impact outcomes.

PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University. This software is often used in industries like construction, retail, education, and healthcare.

The retail inventory method (RIM) is a formula-based approach used by retailers to estimate their ending inventory value without conducting a physical count. This retail method of inventory method uses the relationship between the cost of goods sold (COGS) and the retail price of products. It is particularly useful for retailers who want quick insights into inventory value between physical counts.

Under LIFO accounting, the most recent What is bookkeeping inventory acquisitions are used first to compute the cost of goods sold. The COGS using FIFO amounts to $800, calculated as (100 units × $5) + (50 units × $6), which is $500 added to $300. This is beneficial if the business has multiple locations and performing a physical inventory is a time-consuming and costly process. By using retail inventory, an organization can prepare an inventory for a centralized location.

It has been a popular method for decades because of its simplicity and practicality, especially for businesses with large quantities of diverse merchandise. The retail method of accounting can be helpful for multi-location retailers because it allows for fast, consistent inventory tracking. That helps with organization and provides a holistic view of inventory across all locations, saving time and money. In an uncertain economic climate, it’s important to understand all the accounting options at your disposal. This article will guide you through the retail accounting method Accounting For Architects and hopefully help you decide if this method is right for your business.