Your inventory value would then be $180 since you have five basketballs left purchased for $6 each and 30 left for $5 each. Cost accounting is useful for making internal business decisions that improve a company’s production process, especially for larger businesses with more expenses. With the retail method, you total up the total costs of inventory and the total value of goods for sale, and then divide costs into retail value. In fact, calling it retail accounting makes it sound as if there is a special discipline of accounting, especially for retailers. 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. This is beneficial if the business has multiple locations and performing a physical inventory is a time-consuming and costly process.

You can track your expenses, like rent or employee salaries, on your income statement as well. If you’re a small business looking to understand your inventory value, retail accounting might be a good option. The retail method is different from the other costing methods since it values the inventory based on the retail price instead of the cost to acquire them. This method helps you get an approximate value for your inventory without having to count the inventory often. The retail method works for businesses that mark up their inventory consistently and at the same percentage. Retail accounting software can provide a comprehensive account inventory at the item’s retail price in order to detect losses, damages and theft of stock.

Sales tax, taken care of

Typically, this method is only possible for retail stores with fewer products, higher prices, and lower transaction volume. For example, a car dealership or jewelry shop could keep track of each item in its inventory, but a grocery store generally couldn’t. Accounting can be a long and arduous process, especially if you don’t have experience.

It is accurate only when all pricing across the board is the same and all pricing changes occur at the same rate. The retail method is a quick and easy way of estimating ending inventory balance. A major advantage of this method is that it does not require a physical inventory.

Income statement

Let’s directly divide $4,000 with COGAS at Retail we computed in the table above. This ending inventory at retail will be used later in Step 6 and serve as your beginning inventory at retail for your next period calculation. This ending inventory at retail will be used later in step 6 and serve as your beginning inventory at retail for your next period calculation. Actual COGS is very difficult to track and calculate, whereas sales is easy. This is the primary reason companies use the Retail method to estimate COGS. For example, your business buys water bottles for $10 each and sells them for $25.