Accounting Methods for a Small Retail Store

by Kirk Thomason; Updated September 26, 2017

Retail stores typically have numerous steps to their accounting processes. The movement of multiple products through the store requires detailed reporting. Owners and managers will often review this information closely to determine what is selling well and what is not. Through this data, changes to the stores operational activities can help improve profit maximization. Several accounting tools can make this management process run smooth.

Accounting Method

Businesses selling inventory will often use the accrual accounting method. This method requires the recording of transaction when they occur, regardless of cash changing hands. Retail stores benefit from this method as it provides accurate historical reports for goods purchased and sold. As the retail company grows, it may face future requirements for using the accrual accounting method. Generally accepted accounting principles requires this method for companies to report financial information.

Inventory Accounting

Inventory accounting requires one of two methods for reporting: periodic or perpetual. The perpetual inventory method works best for retail stores. Under this method, the store’s inventory account receives updates after each purchase, sale or adjustment of goods in the store. Counting inventory on a continual basis is not a requirement of the perpetual inventory method. The company can conduct an annual inventory to make adjustments to the account.

Internal Controls

Retail stores need internal controls to protect their inventory. Common controls include purchase order authorization, separation of duties, inventory turnover performance reviews, limiting access to inventory and restricting access to accounting information. Owners and managers must write their controls down and enforce them in the store. Corrective actions may be necessary when employees fail to follow the internal controls. This refines the controls and ensures they work as intended.

Common-size Financials

Merchandise companies often use a common-size income statement for reporting. This lists all items on the statement as a percentage of sales. The statement provides a quick review of how much capital the retail store spends on inventory, cost of goods sold, and expenses to run the store. To create a common-size income statement, the owner simply divides all line items by the current period’s total sales. Creating a trend simply requires comparing the current month’s information to a previous period.

References

  • "Fundemental Financial Accounting Concepts"; Thomas P. Edmonds, et al.; 2011

About the Author

Kirk Thomason began writing in 2011. In addition to years of corporate accounting experience, he teaches online accounting courses for two universities. Thomason holds a Bachelor and Master of Science in accounting.