ASC 330-10 Inventory - Overall: Retail Inventory Method Transaction Explained with Journal EntriesPosted In | ASC Education | Gridlex Academy
Managing inventory is a critical aspect of running a successful retail business. Accurate inventory valuation is essential for proper financial reporting and decision-making. ASC 330-10, Inventory - Overall, provides guidance on inventory valuation, including the retail inventory method (RIM). This article explains the retail inventory method transaction under ASC 330-10, along with illustrative journal entries.
Understanding Retail Inventory Method (RIM)
The retail inventory method is an accounting technique that estimates the value of ending inventory using a cost-to-retail price ratio. It is primarily used by retail businesses to value their inventory when tracking individual items is impractical or time-consuming. RIM provides a simplified approach to inventory valuation by linking the cost and retail value of merchandise.
Key Concepts in Retail Inventory Method
1. Cost: The actual cost of merchandise inventory, including invoice price, freight, and other costs associated with acquiring the inventory.
2. Retail Price: The selling price of the merchandise inventory, excluding any discounts, allowances, or sales returns.
3. Cost-to-Retail Price Ratio: A ratio calculated by dividing the cost of goods available for sale by the retail price of goods available for sale.
4. Ending Inventory at Retail: The retail price of goods remaining in inventory at the end of the accounting period.
5. Estimated Ending Inventory at Cost: The estimated cost of ending inventory, calculated by multiplying the ending inventory at retail by the cost-to-retail price ratio.
Journal Entries for Retail Inventory Method
To illustrate the journal entries for the retail inventory method, let's assume a retail business starts with a beginning inventory at a cost of $50,000 and a retail price of $100,000. During the accounting period, the company purchases additional inventory at a cost of $200,000 and a retail price of $400,000. The sales for the period amount to $350,000 at retail price.
1. Record the beginning inventory:
Dr. Inventory $50,000
Cr. Inventory Payable (or Cash) $50,000
2. Record the purchases during the period:
Dr. Inventory $200,000
Cr. Inventory Payable (or Cash) $200,000
3. Record the sales during the period:
Dr. Cash (or Accounts Receivable) $350,000
Cr. Sales Revenue $350,000
4. Calculate the cost-to-retail price ratio:
Cost-to-Retail Price Ratio = (Beginning Inventory Cost + Purchase Cost) / (Beginning Inventory Retail Price + Purchase Retail Price)
Cost-to-Retail Price Ratio = ($50,000 + $200,000) / ($100,000 + $400,000) = 0.5
5. Calculate the ending inventory at retail:
Ending Inventory at Retail = (Beginning Inventory Retail Price + Purchase Retail Price) - Sales Revenue
Ending Inventory at Retail = ($100,000 + $400,000) - $350,000 = $150,000
6. Estimate the ending inventory at cost:
Estimated Ending Inventory at Cost = Ending Inventory at Retail × Cost-to-Retail Price Ratio
Estimated Ending Inventory at Cost = $150,000 × 0.5 = $75,000
7. Record the cost of goods sold:
Dr. Cost of Goods Sold $175,000 (Beginning Inventory Cost + Purchase Cost - Estimated Ending Inventory at Cost)
Cr. Inventory $175,000
The retail inventory method under ASC 330-10 provides a simplified approach to inventory valuation for retail businesses. By understanding the key concepts and journal entries involved in RIM, retail companies can maintain accurate inventory records and make informed financial decisions. This method is particularly useful for businesses with a large volume of inventory items and frequent turnover, as it streamlines the inventory valuation process and reduces the time spent on tracking individual items. By using RIM, retail businesses can focus on their core operations, enhance efficiency, and ultimately improve their financial performance.