Cost of sale for a retailer
A merchant's cost of sales are purchased price for products that the entity paid to its supplier (since it does not produce anything) and any additional expenses that the organization had to turn the merchandise into inventory (i. e. shipping and handling). In other words, all cost that associates with getting goods to be ready putted on the shelves for further sale to the firm’s customers. Since purchased price of goods will fluctuate all the time such inventory costing methods can be used as FIFO, LIFO, and weighted average. FIFO stands for first in first out. LIFO stands for last in first out.
How to compute cost of sales for a merchant
Calculation of cost of sales for a retail company is less complicated than to compute cost of goods sold for a manufacturing firm. To calculate cost of sales usually retailers (merchants) will take beginning balance of their inventory account (which is the ending balance of the inventory account for the previous period) and sum any additional purchases made by the firm during the period then subtract ending balance of the inventory account.
Continuously from one period to another the beginning balance of the inventory account will be the same as ending balance of the inventory account from the previous period. However, if an entity just started the business then this amount will be $0. Ending balance of the inventory account will be cost of merchandise that is still left in the firms’ shelves or in warehouses at the end of the period.
For example, let’s assume that a retail store sells shoes on a regular basis. Therefore, their inventory will be ready to sell shoes. When they purchase additional shoes for the resell then they need to add to gross purchases any freight in (if the buyer pays) and subtract returns, allowances, and discounts (if any).
The retail shoe company might use whether the “T-account” with BASE formula or compute that without using the “T-account”. BASE formula brakes down to “B” – beginning balance of an account, “A” – adding, “S” – subtracting, and “E” – ending balance of an account. According to the BASE formula the shoe store will take cost of shoes from the previous period assuming this is the beginning balance and add any additional cost of purchases new shoes during current period to find out what was the cost of goods available for sale (GAFS). After that the cost of shoes that were not sold during that period should be subtracted from GAFS to find out cost of sales.
|Dr. Inventory Cr.|
|Goods Avail -able For Sale||
- Cost of sales
|= Ending Balance|
* Since inventory as a current asset account has normal debit balance the computation should be started from the left side of the T-account.
|Ending inventory||Cost of sales|
|Cost of sales||Ending innventory|