The retail inventory method is also known as the retail method and the retail inventory estimation method. Last in, first out is a method used to account for inventory that records the most recently produced items as sold first. Ending inventory is a common financial metric measuring the final value of goods still available for sale at the end of an accounting period.

The retail accounting inventory method is an accounting tool that quickly estimates the value of your merchandise. More specifically, the RIM gives an assessment of ending inventory value by measuring the cost of inventory items in relation to the price of said goods. This method makes use of sales data and cost-to-retail ratio to generate its estimates, meaning retailers can gather approximations without having to sort through each of their warehouse shelves. According to California State University Northridge, the retail method is especially useful for quarterly financial statements.

Tax Ramifications of Inventory Costing:

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. 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. Although you could use an average markup in this instance, it will make your estimate more unreliable. There are five ways in which a business can choose to calculate the cost or value of inventory.

When evaluating offers, please review the financial institution’s Terms and Conditions. If you find discrepancies with your credit score or information from your credit report, please contact TransUnion® directly. Billie Anne has been a bookkeeper since before the turn of the century. She is a QuickBooks Online ProAdvisor, LivePlan Expert Advisor, FreshBooks Certified Partner and a Mastery Level Certified Profit First Professional. She is also a guide for the Profit First Professionals organization. In 2012, she started Pocket Protector Bookkeeping, a virtual bookkeeping and managerial accounting service for small businesses.

What Is the Retail Inventory Method and How Do You Use It?

Since the retail inventory method is just an estimation technique, expect that there will be differences in the physical count and retail method estimations. The retail method becomes more complicated when there are subsequent markups and markdowns to the initial retail price. These adjustments can be dealt with using either the Conventional Method or Average Cost Method. For example, if you own a dollar store that sells an array of items that include deodorant, fidget spinners, dish soap, etc.

PayTraQer is among the best accounting automation software from SaasAnt which you can depend on when it comes to turning bookkeeping into an easy task. One can use such software along with the retail method for the best results. It’s a well-known fact that most of the business owners have a tendency to constantly shift costing methods, so as to get the best of tax advantages.

Cons of the retail inventory method

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. Amounts deducted from the original retail price of a product or service. Amounts added to the original retail price of a product of service.

Cost accounting is a more conservative inventory valuation method that values inventory based on its cost. Retail accounting, on the other hand, values inventory based on items’ retail price. The cost method of accounting holds cost at the individual item level. For inventory valuation, the item WAC is multiplied by the quantity on-hand.