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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.
When goods or services are purchased on account from a vendor, the invoice will stipulate the vendor invoice payment terms. These payment terms indicate when an invoice is to be paid.
For example, an invoice might stipulate payment terms net 90 or net 390 terms, which means that the full amount of the invoice is due for payment 90 days from the date of the invoice.
Accounts payable are amounts which are owed by you to your suppliers for the purchase of trade goods or services, they are sometimes referred to as trade payable or trade creditors.
Accounts payable are recorded in the balance sheet of the business under the heading of current liabilities, that means they are payable within a year.
The operating leverage shows the level of fixed cost leverage within a business, and the degree of operating leverage shows the impact of the cost structure on the operating income of the business.
The operating income for a business with high leverage can change dramatically for a given change in the number of units sold, and its earnings are said to be more volatile and therefore more risky
The income statement shows a business’s financial performance over a specified accounting period. It summarizes the income and expenses for the period resulting in either a net income or a net loss for the business.
The accounting period can be any length but for management account purposes is usually a month, and for legal financial reporting purposes is normally a year.
Unpaid wages are wages which have been earned by an employee during an accounting period but which remain unpaid at the end of the accounting period.
Under the accruals basis of accounting an adjusting entry needs to be made to provide for the unpaid wages based on the hours worked and the wage rate.