Retail accounting differs from standard accounting in a number of ways, with the primary complication being inventory accounting. Please note that federal, state, and local laws related to accounting change regularly and vary based on location. The information below and the For Dummies series are essentially primers and you should consult with an accounting professional if you have any questions or concerns. Below is a sample of the differences in retail accounting versus standard accounting.
Sales Tax Reporting
A tax is levied on retail sales in most states. According to the law, monies collected should be immediately passed on to the government. Thus, according to HarborTouch, “all taxes on sales have to be recorded as payable. Retail accountants can, therefore, know the total of taxes to be paid at any given time from ‘tax payable.’ In other industries, it is recorded as revenues to be reversed at tax times.”
While that is straightforward enough, there are complications which can stem from determining your location. The Balance Small Business says, “If you have a tax presence … in different states, you may have to collect different taxes on different items.” Online retailers need “to figure out if you have to collect sales tax from customers.” In addition, not all items are taxable, and the list isn’t standard across states.
Any business which includes staff beyond the owner must consider payroll processing. A complication in retail accounting comes from the fact that many small retail businesses hire temporary or seasonal staff (as opposed to permanent staff) during the busy season.
Because of the different types of employees, “Salaries payable will therefore not be standardized, and changes will be inherent every month,” says HarborTouch. In addition, each year “business and individual tax[es] for both permanent and temporary employees have to be calculated and returns filed.”
While Fundera says retail accounting is a bit of a misnomer as it is not a special kind of accounting, “but rather an inventory valuation technique often used by retailers. It differs from ‘cost accounting’ for inventory in that it values inventory based on the selling price rather than the acquisition price.”
A company’s inventory, which is typically its biggest expense, is considered an asset since the retailer technically owns it and, thus, needs to be managed or tracked for costs. “This can become especially complicated when items have different prices and initial costs, so there are several methods for calculating the cost of your inventory,” says business.com.
Below are a few ways a retailer can track the value of the inventory. FIFO First In, First Out (FIFO) means those first items added to your inventory will be recorded as the first to be sold. This method is favored when the inventory is perishable with clear expiration dates. The cost of older inventory is assigned to cost of goods sold while the cost of newer inventory is assigned to ending inventory.
Fundera says, “FIFO inventory costing assumes any inventory left on hand at the end of the accounting period should be valued at the most recent purchase price. Anything purchased at an older price would have been discarded due to spoilage and lapsing expiration dates.”
FIFO tends to be a more accurate depiction of inventory value. Fit Small Business says ,“The inventory that remains on the shelf at the end of the month or year is valued at a cost that is closer to what the current price is for those items.” On the downside, your business may “reflect a higher profit under the FIFO [as compared to LIFO] which … could result in a higher tax bill.”
LIFO or Last In, First Out is the opposite of FIFO in that the newest additions to the inventory are the first to be sold. Also, opposite of FIFO, the small businesses who use this method are dealing with non-perishable items and the inventory is valued based on earlier prices depending upon sales.
Inc. suggests companies that have stable or increasing inventory costs use LIFO. Haden adds, “Companies that use LIFO inventory valuations are typically those with relatively large inventories and increasing costs because LIFO typically results in lower profit levels, lower taxes, and as a result higher cash flow.”
The weighted average method considers the cost of each item of inventory in stock. This method is more likely to be used with inventory that is interchangeable and not perishable.
Because the same items could be in stock for differing amounts of time, purchasing costs could vary. Therefore, Fundera says the “retailer will take a weighted average and spread the average cost over all the existing inventory.” This method is more time consuming.
The retail method provides an approximate value of the inventory. Investopedia says of this method that it, “provides the ending inventory balance for a store by measuring the cost of inventory relative to the price of the merchandise… the retail inventory method uses the cost-to-retail ratio.” They also suggest doing a periodic physical inventory for accuracy purposes.
Providing an approximate value of inventory, some see the retail method as simpler. There is no need to count items or match the ‘cost to items still on hand.’ According to Fundera, “The retail method works only if the retailer’s markup on the inventory is consistent across their entire inventory. If items are marked up at different percentages, the retail method will not give you an accurate value of your inventory.”
Retail accounting is different from standard accounting and retailers need to carefully consider their accounting system to ensure they are in compliance with generally accepted accounting practices.
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