How To Manage Inventory And COGS In Retail Bookkeeping?

Managing inventory is a daily challenge for retail businesses. This poor tracking can produce stock-outs, overstocking of stock, inventory shrinkage, and inaccurate financial reports. Retail inventory management bookkeeping helps retailers to keep track of purchases, sales, inventory levels, and costs.

COGS refers to the direct cost of the goods that a business sells. The formula for the most basic COGS is as follows: COGS = Beginning Stock + Acquisitions − Ending Stock. Retailers’ shortcut this process by quality tracking inventory and using the data for COGS, gross profit margin, and wiser purchasing decisions.

What is Inventory Tracking, and Why Do Retailers Need It? 

Inventory tracking records what a retail business buys, stocks, and sells. It helps companies determine the quantity of inventory they have and the cost of each item.

Inventory is a key business asset for retailers. Accurate retail accounting inventory records are also needed to calculate COGS and prepare reliable financial reports.

What Inventory Tracking Involves?

Inventory tracking for retailers usually includes:

• Recording inventory purchases
• Tracking products received and sold
• Monitoring stock levels
• Recording returns and damaged goods
• Tracking product transfers
• Identifying slow-moving products
• Recording inventory shrinkage
• Comparing physical stock with accounting records

Inventory software or POS to accounting software can simplify these tasks.

What If Inventory Tracking Is Off?

Improper inventory tracking can cause:

• Stockouts: Popular products may run out before they are reordered.
• Overstocking: Excess stock can tie up business cash.
• Shrinkage: Theft, damage, and errors can cause inventory losses.
• Incorrect COGS: Wrong inventory values can lead to incorrect COGS.
• Poor financial reporting: Incorrect inventory figures can affect reported profits.

Following inventory management best practices retail companies can utilize to lessen these issues.

What Is Cost of Goods Sold (COGS) in Retail? 

Retail COGS is the direct cost of products sold within an accounting period.

Stores usually include the $20 cost of buying a shirt and selling it to a customers in COGS.

What’s Included in COGS?

Depending on the accounting method and applicable rules, COGS may include:

• Product purchase costs
• Direct costs related to acquiring inventory
• Certain inbound freight and shipping costs

In general, COGS excludes indirect operating costs like

• Office rent
• Advertising
• Administrative expenses
• General utilities
• General business insurance

The exact treatment of some costs can vary, so retailers should consult an accountant when needed.

Why Does COGS Matter?

COGS directly affects gross profit.

Gross Profit: Sales Revenue – COGS

When COGS rises while sales stay the same, gross profit falls. Product profitability and cost control are improved by accurate COGS in retail bookkeeping.

The COGS Formula, Explained

COGS = Inventory at the beginning of the period + Purchases – Inventory at the end of the period Which means if a store started January with $20,000 worth of stock, bought another $50,000 worth during the year, and ended with $15,000

Then COGS = +$20k + $50k – $15k, so COGS = $55,000. 

Therefore, this retailer has a cost of goods sold figure of $55k. A small error in inventory can lead to an adjustment in the COGS calculation, so good records for stock are necessary.

FIFO vs. LIFO vs. Weighted Average Cost: Inventory Valuation Methods

Inventory valuation methods are used by retailers as part of this process to determine the cost associated with the products that have been sold as well as how much value is assigned to any remaining inventory. The main retail inventory valuation methods include FIFO, LIFO, and weighted average cost.

FIFO: How It Works?

FIFO means First-In, First-Out. It assumes the oldest inventory is sold first.

FIFO can work well for retailers selling products that expire, become outdated, or need to be sold in the order they are received.

LIFO: How It Works?

LIFO means Last-In, First-Out. It assumes the newest inventory is sold first.

LIFO can produce different COGS and inventory values compared with FIFO. However, LIFO is not permitted under IFRS, and U.S. businesses must follow specific tax and accounting requirements.

Weighted Average Cost

Weighted average cost assigns an average cost to the inventory. When a retailer sells a range of similar items at varying prices, it can lead to benefits.

Which Retail Inventory Valuation Method Is Best?

The best inventory valuation method for retail depends on items, accounting, inventory systems, and business demands.

What retailers should consider:

• Product shelf life
• Changes in product costs
• Inventory turnover
• Tax requirements
• Accounting software
• Reporting needs

Businesses should also use their chosen method consistently and seek professional advice before making changes.

How to Track Inventory in Retail? Step by Step

Knowing how to track inventory for a small retail business starts with a simple and consistent process.

Step 1: Receive and Check Inventory

Compare incoming products with the purchase order and supplier invoice. Check quantities, prices, product details, and damaged items before updating your records.

Step 2: Organize Inventory

Use SKUs, barcodes, labels, or product codes to arrange inventories. Good storage techniques decrease errors and damage and make things easier to find.

Step 3: Track Sales and Stock Levels

Connect your POS system with inventory software when possible. When a product is sold, the system can automatically update stock levels.

Step 4: Perform Physical Counts

Regular physical counts help identify differences between actual inventory and accounting records.

Look for problems caused by:

• Theft
• Damage
• Incorrect receiving
• Data-entry mistakes
• Unrecorded returns

Step 5: Keep Track of Slow Inventory

Review inventory reports regularly to locate unsold items. Slow-moving stock can lock up funds and need discounts or write-downs.

Best Inventory and COGS Tracking Software for Retail

The right software can simplify retail inventory management bookkeeping by connecting sales, inventory, and accounting information.

QuickBooks Online

QuickBooks Online can support retail accounting and financial reporting. Retailers can connect compatible inventory and POS applications to improve their bookkeeping workflow.

Xero

Xero can be connected with inventory and retail applications to bring sales and inventory information into the accounting process.

POS and Inventory Platforms

Retailers have multiple tools to choose from, like Shopify, Square, Lightspeed, and Cin7. The right decision would depend on what products, sales channels, inventory levels, and integration the business requires.

Best Retail COGS and Inventory Management Practices

Consistent practices increase inventory accuracy and bookkeeping.

These practices are especially important for retail bookkeeping for inventory-heavy businesses.

Common Inventory and COGS Mistakes Retailers Make

Using Different Valuation Methods

Changing valuation methods without proper accounting guidance can make financial results difficult to compare.

Skipping Physical Counts

Even automated systems can contain errors. Physical counts help confirm that recorded inventory matches actual stock.

Including the Wrong Costs in COGS

Not every business expense belongs in COGS. Mixing indirect expenses with product costs can make gross profit calculations inaccurate.

Ignoring Inventory Shrinkage

Inventory shrinkage and COGS impact should be monitored carefully. Theft, damage, and recording errors can cause differences between actual and reported inventory.

How to Reduce COGS in Retail?

Retailers looking for how to reduce COGS in retail should focus on controlling product costs without reducing product quality.

Useful strategies include:

• Compare supplier prices
• Negotiate better purchase terms
• Reduce excess inventory
• Monitor product turnover
• Identify slow-moving products
• Reduce inventory waste
• Track shrinkage
• Improve buying forecasts

FAQs

How do you calculate Cost of Goods Sold (COGS)?

COGS = Beginning Inventory + Purchases – Ending Inventory.

Accounting period inventory cost is calculated using this formula.

What’s the Difference Between FIFO and LIFO?

FIFO assumes the oldest inventory is sold first. LIFO assumes the newest inventory is sold first. The two methods can produce different COGS and ending inventory values.

Can a Retail Business Switch Inventory Valuation Methods?

A business may be able to change its inventory valuation method, but accounting and tax rules may apply. Retailers should consult an accountant before making a change.

Do COGS Include Shipping Costs?

Certain inbound freight or shipping costs related to acquiring inventory may be included in inventory costs. Delivery of goods to customers often results in the goods being treated differently.

How frequently should a retailer carry out a physical inventory count?

The right frequency depends on the business. Many retailers perform a full count periodically and use cycle counts throughout the year.

Which Software Package is Recommended for Retail Inventory and COGS Tracking?

The choice is quite individual, which makes it a bit difficult to say which one is the best choice for all. QuickBooks Online, Xero, Shopify, Square, Lightspeed, and Cin7 can, to some degree, match different inventory management and accountancy requirements.