Retail Accounting, Costing and Financial Literacy
Key retail numbers
The exam tests the difference between margin, markup and profit. Gross margin = selling price − cost of goods sold. Gross margin % is gross margin ÷ selling price. Markup % is usually gross margin ÷ cost. Net profit = gross margin − operating expenses. Cash profit and accounting profit differ when credit sales or unsold stock exist.
Stock and break-even
Closing stock is an asset; cost of goods sold = opening stock + purchases − closing stock. Shrinkage reduces stock and profit. Break-even sales = fixed costs ÷ contribution margin ratio, where contribution = sales − variable costs.
Worked example
An item costs ₹60 and sells for ₹100. Gross margin is ₹40; gross margin % = 40 ÷ 100 = 40%; markup on cost = 40 ÷ 60 = 66.7%. If the retailer wants a 40% margin on selling price, price = cost ÷ (1 − 0.40) = 60 ÷ 0.60 = ₹100. The reasoning: margin is based on selling price, markup on cost; using the wrong base understates or overstates price.
Traps
Do not add GST to revenue as if it were income; GST collected is a liability. Do not treat a cash sale as profit before deducting cost and expenses. Do not confuse markup with margin. Do not ignore markdowns, damages and stock loss when calculating real gross margin.