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Finally, throughout the quarter, you purchased new yarn and accessories, which cost a total of $10,000. Inventory is actually considered an asset — something your business owns, which is recorded on your business’s balance sheet — until you sell it or account for it as shrinkage from theft or damage. At that point, the expense for the purchase of the inventory is recorded as cost of retail accounting sales (COS) or cost of goods sold(COGS) on your profit and loss statement. This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services.

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The retail method of accounting provides several advantages for retailers when calculating cost for profitability and inventory that impacts every aspect of the merchandising process. Retail stores and consumer products businesses operate in a highly competitive environment. Moreover, as businesses reliant on consumer spending, retail businesses are highly sensitive to economic conditions. As the economy slows, consumers have less money in their pockets and are less willing to spend money on consumer goods. With e-commerce delivering vast choice, new levels of service, and 24/7 accessibility, direct-to-consumer channels rival or surpass bricks and mortar in attracting customers and facilitating sales.

Future Proof Retail

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Consumer & Retail

You have a responsibility to ensure the financial success of your business. The IRS allows you to use any method you want to value your inventory for tax purposes. The caveat is, once you choose a method you have to stick with it, unless you get permission from the IRS to change your costing method.