The Gross Profit Method of Inventory Accounting

The gross profit method can be used to calculate the average inventory at the end of a particular accounting period. The basic use of gross profit method of inventory accounting occurs when inventory has to be calculated physically between the certain accounting periods. This method is also used to calculate inventory for the purpose of insurance claim reimbursement.

The simple steps taken to calculate inventory on the biases of gross profit method can be explained as under:-

The cost of goods to be sold can be calculated by adding the total cost of the inventory at the beginning and the cost of the inventory that is purchased during that particular accounting period.

The estimated cost of goods can be calculated by the figure that arrived after subtracting expected gross profit from 1 that is (1- expected gross profit)

At the step three the ending inventory is calculated by subtracting the total cost of goods sold from the goods that are still present in the inventory to be sold.

Although gross profit method of inventory calculation can help us in find the ending inventory however this method also have some limitations. One of the limitations is expected gross profit percentage that is the key component of the formula. This gross profit percentage is based on historical data of the business and is not 100 percent accurate. This calculation is best suited for the retail purchases and it is difficult to use in manufacturing environment.

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