Inventory

All businesses use small consumable items such as paper, pens, paperclips, light bulbs, hand towels etc. Normally a small amount of these items is kept available for immediate use, and this is referred to as supplies on hand.

In the absence of a physical inventory count at the end of an accounting period, the gross profit method is a method of estimating the value of ending inventory using historical gross profit percentages.

Lower of cost or market is a term used to refer to the method by which inventory is valued and shown in the balance sheet of a business. The lower of cost and market rule states that the inventory must be shown at the lower of cost or replacement cost subject to upper and lower limits on replacement cost.

The retail inventory method is a method of estimating the value of closing inventory in the absence of a physical inventory count at the end of an accounting period.

As the name implies, the retail method is used primarily by retailers who often maintain their memorandum inventory records at retail values. The method involves the follows steps.

A business can account for its inventory using one of two accounting inventory systems either the periodic or perpetual inventory system.

The period inventory system is less time consuming to maintain but does not provide details of the inventory and costs of sales during the accounting period. In contrast, the perpetual inventory system requires details of each inventory movement to be recorded, but is ideal in situations such as a retail environment, where accurate levels of inventory are required at all times.