Retail Accounting Methods 101 for Retailers

Retail Accounting Methods 101 for Retailers

For every business, it is vital to keep an accurate record of your finances. It is no surprise that retailers face unique challenges in maintaining proper financial records, monitoring and calculating the inventory. Although daunting, these tasks are essential for accurate accounting. Read on to learn about retail accounting, retail accounting methods, and inventory valuation best practices.

What is Retail Accounting?

Retail accounting is a type of inventory valuation commonly used among retailers. It is a comprehensive account of available items and the monetary value of these inventory items. In simple terms, retail accounting counts the cost of inventory relative to the selling price. 

In retail accounting, you estimate the cost of inventory and price change rates across all units of the same item. Make quick calculations across the available stock. Then, subtract that figure from the retail value of all the inventory to calculate the total cost.

Retail Accounting Methods

The retail accounting methods should not be confused with the standard accounting process. Retail accounting deals majorly with how inventory is valued. To keep track of your revenue and profits, you must at all times monitor the item cost and the value of the stock you have left. Some of the methods used for retail accounting are clarified below.

Let us break each method down using the example of a clothing store. Your Kiddies store buys a pack of socks for #700 – #1000 each. Sometimes this number goes up or down slightly based on what the store manager says. Let us estimate you bought 50 packs at #700 each in January and 40 at 800 each in February. Now let us track your inventory using the following costing methods.

1. FIFO Retail Accounting Method

First-in First-Out or FIFO is one way of finding the cost of your inventory. FIFO a form of sales where the inventory items that come in first have to be the ones that get sold first. Using the example above, in essence, the first pack of socks you sell will cost #700. After you have sold through the first 50 packs of socks (the number of socks you purchased in January), your 51st pack of socks would cost #800 until the 90th (the 40th socks bought in February).

2. LIFO Retail Accounting Method

Last in First-Out or LIFO is another retail accounting method you can use to know the inventory cost. Under this method, if you were to sell a pack of socks, you will sell first the inventory that came in February before selling your January stock.

In this method, the cost of the last order of your socks applies to the number of goods sold. When a customer buys a pack of socks, regardless of when it arrives in your stock, this inventory method will say the socks cost the most recent batch cost of #800 per pack. If your business sells more than the 40 pack of socks you ordered in February, you switch to January pricing.

3. Weighted Average:

Understandably, the packs of socks have gotten mixed up, and there is a good chance you have sold several socks from the two orders. The weighted average method combines the best of both LIFO and FIFO. Rather than selling through one set of inventory at a time, this method takes an average of your inventory cost based on each purchase order price and quantity. Divide the total cost of the socks by the total number of socks purchased to get the weighted average.

4. Retail Method

The last is the retail inventory method. The Retail Method uses an entirely different approach, whereby it uses the total value of your inventory instead of calculating the inventory items per unit cost. In other wordshow much do the entire packs of socks cost if you were to sell them?

The retail method gives an estimated cost by eliminating your price markup. Using the same example of socks, let us assume your kiddies store generally charges a 30% price markup on all goods. If you see that you have made #20,000 from the sales of socks (looking at retail price alone), you could subtract by 30% to find your approximate cost. In this case, that would be #14,000 as the cost of all the socks sold.

The pointer here is to recognize that the retail method only approximates your cost of goods sold. It can not determine your exact inventory cost based on other specific variables.

The pros and cons of using this method are:

The Retail Method is a quick and easy way of estimating your inventory balance, especially if you have multiple storefronts. The Retail Method does not require a physical inventory.

This method runs on the assumption that all units of one item are priced the same and experience the same price changes. Hence, calculating your inventory’s value is simple. This streamlined calculation makes preparing financial statements far easier as well. If the price of your items changes often, the inventory cost using this method will be inaccurate. It becomes accurate only when all pricing is the same across the board and with all pricing changes occurring at the same rate.

The retail method assumes a constant markup. So when you run promotions, this method can quickly become inaccurate.

Finally, in most cases, the retail method is flawed because there are sometimes variations in product prices. For example, theft, depreciation, product damage, and so on can affect the inventory cost. As a result, the calculations made using the retail method should serve only as an estimate.


Inventory Valuation Best Practice 

1. Use a POS System: You must have an inventory management system in place. A great point of sales (POS) system will have these various methods, and based on which you chose, your POS system will help calculate your cost of goods automatically.

2. Get The Help Of A Professional: Inventory Management is no joke. High volume retailers will need an extra hand to oversee the inventory management system and ensure all employees carry out the right processes.

3. Perform Physical counts at Least Biannually: Counting every piece of inventory by hand is a time-consuming process, but it is the only way to ensure the numbers align with what you have in your POS System reports. Your accountant can make an inventory adjustment and get your books back in order.

4. Carefully Choose Your Inventory Method: If you are trying to decide on your inventory valuation method, know that it is not easy to switch from one to the other. So, be sure to give it a long hard, and holistic thought before settling for one.


While deciding on a retail accounting method might seem like a hassle, the truth is a great POS System does the heavy lifting for you. In most cases, all you’ll need to do is export a report at the end of the period to have an accurate understanding of your inventory cost.

Retail Accounting methods can be a valuable tool for creating forecasts or making go-to decisions. Want to see how POS Shop Limited can help your Retail Business? Request a personalized demo today at