The retail inventory method is an accounting method used to estimate the value of a store’s merchandise. The retail method provides the ending inventory balance for a store by measuring the cost of inventory relative to the price of the goods. Along with sales and inventory for a period, the retail inventory method uses the cost-to-retail ratio. The retail method of valuing inventory only provides an approximation of inventory value since some items in a retail store will most likely have been shoplifted, broken, or misplaced.

The retail inventory method is only an estimate and should always be supported by period physical inventory counts. Having a handle on your inventory is an important step in managing a successful business. It allows you to understand your sales, when to order more inventory, how to manage the cost of your inventory, as well as how much of your inventory is making it into the hands of consumers, as opposed to being stolen or broken. When it comes to inventory management and syncing these two components, the benefits are insurmountable. 

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