Before selling, decide on an accounting method you’ll use to track the cost of goods sold (COGS). This is necessary for accounting, item pricing, and measuring the profitability of your business. Retail POS offers two methods for tracking inventory costs: average cost, and first in, first out (FIFO). The appropriate cost method will depend on your daily operations, resources, and what you sell.

Understanding key inventory terms

Retail POS uses a few key terms when tracking the cost of items. Understanding these concepts can help with choosing the right accounting method for your needs.

• Item: A product, like Kid's Striped T-Shirts.
• Unit: An individual item instance, like a single Kid's Striped T-Shirt, M. Each unit has an associated cost, depending on the accounting method selected.
• Inventory: Typically used as a comprehensive term encompassing your inventory as a whole, including everything available in store, reserved inventory, etc. It can also refer to available units of an item, like an inventory of 200 Kid's Striped T-Shirts or an item’s Quantity on Hand (QOH).
• Inventory lot: A single reception of units. For example, you received 200 units of Kid's Striped T-Shirts, then later received 150 more. Even though the same item was received at the same cost, the units are grouped into two inventory lots since they were received separately. Inventory lots are generally used with the FIFO accounting method.

Understanding average cost and FIFO accounting methods

Retail POS offers two methods for tracking cost: first in, first out (FIFO), and weighted average cost. Selecting which accounting method to use depends on the nature of your business and your accounting preferences.

Average cost

• Default accounting method in Retail POS.
• Calculates a single value for each item based on a rolling average. Each time units are received from a vendor, the average cost is recalculated by adding the cost of the newly received units to the current total cost of all inventory units, then dividing by the resulting quantity. This calculation includes available, reserved, and in-transit units. Most inventory movements that remove quantity, such as sales, don’t change the average cost.
• Calculations are done on an account-wide basis, so all locations share the same averages.
• When units are sold, the current average cost is used as the cost of goods sold (COGS) for those sale lines.
• Removes the need to track individual units and lots.
• Offers less detailed information than FIFO.

Tracking average cost is useful if you:

• Sell large numbers of identical and physically mixed items, such as hardware or office supplies.
• Experience frequent but minor price fluctuations.
• Want to minimize resources spent on record-keeping.
• Don’t need to sell products in a set physical order, like you would if you were selling goods that expire.

First In, First Out (FIFO)

• Tracks the exact cost of units by combining inventory receptions into lots which each have a set cost.
• When a sale is made, removes units from the oldest lot in the current location first, until the lot is empty. The lot is then considered closed and removed from the queue. Sales then pull units from the next oldest lot, and so on.
  • COGS for the sale line is the total cost of all units removed from lots to satisfy the requested quantity. The sale line’s unit cost is expressed as the average of the lot cost of each unit.
  • Once the lot’s QOH reaches zero, the lot is considered closed.
• Makes calculating exact COGS simpler but tracking inventory lots more complex. Retail POS tracks this information for you automatically.

Tracking FIFO is useful if you:

• Sell perishable goods, like food or products with short life cycles, like seasonal clothing.
• Sell high value items, like electronics or luxury goods where it’s necessary to ensure the profitability of each unit sold.
• Operate in a high-inflation environment, in which FIFO ensures that COGS is based on older, lower-cost inventory.

Whenever a location receives inventory, Retail POS groups the units received into an inventory lot. Each lot tracks cost and unit quantity details:

• Cost/Unit: Cost per unit in the lot.
• Qty In: How many units were added in this lot.
• Qty On Hand: How many units remain in this lot.
• Qty Out: How many units were removed from this lot.
• Adjustments: Number of units manually removed, including sales or units reserved for special orders and layaways.

Refunding or voiding a sale, returning a transfer, reopening a vendor return, or canceling a reservation restores inventory to its original lot. If the lot was closed, it will reopen. Reduced reservation quantities or partial refunds will send units to the newest lot first so the oldest units are still considered sold.

Setting up the FIFO accounting method

Changing the default accounting method to FIFO

By default, Retail POS uses the average cost method. To change it to FIFO in your account:

1. Navigate to Settings > General Options.
2. Scroll down to Accounting.

3. From the Cost method dropdown, choose First in first out cost (FIFO).

   

4. Click Save Changes.

Viewing FIFO inventory adjustments

Each change to a lot creates a new inventory adjustment. You can view the actions that caused inventory adjustments in the Inventory Lot Changes table.

1. Navigate to Inventory > Item search.
2. Locate the item using the item search and click it.

3. Click History and scroll down to the Inventory Lot Changes table.

   

4. Click on a lot’s Inventory ID to access its details, including the actions that triggered the inventory adjustment.

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