Your margin is only as good as your count
Cost of sales in retail is derived, not looked up. If the count is loose, every gross profit figure you have ever reported is an estimate — and shrinkage stays invisible until someone measures it.
In retail, cost of sales is not a number you look up — it is a number you derive from counting. Opening stock plus purchases minus closing stock. Which means that if you do not count properly, you do not know your margin, and every gross profit figure you have reported is an estimate dressed as a fact.
Shrinkage is a measurement problem before it is a security problem
Stock loss in retail comes from theft, but also from damage, expiry, mispicked deliveries, unrecorded staff consumption, till errors and supplier short-shipments. Untracked, all of it lands silently in cost of sales and presents as a margin that has drifted a point or two for reasons nobody can name. Retailers who count properly can quantify shrinkage, locate it by store and category, and act. Retailers who do not, cannot — and typically conclude their buying is at fault.
What good stock discipline looks like in a mall store
- Perpetual records from the POS, so a theoretical stock figure exists at any moment.
- Cycle counts on high-value and fast-moving lines weekly or monthly, rather than one traumatic annual count.
- A full count at year end, attended and documented, because it underpins the financial statements and any auditor will test it.
- Variance investigation with a threshold — a defined percentage that triggers a look, so small losses surface early.
- Goods-received discipline — deliveries checked against the purchase order and the invoice, not signed for at the door.
- Wastage, damage and staff consumption recorded separately, so they are visible costs rather than hidden margin erosion.
Valuation, and where it bites
Inventory is measured at the lower of cost and net realisable value. In fashion and seasonal retail that is not a formality: end-of-season stock that will only clear at 60% off is not worth its cost, and carrying it at cost overstates both assets and profit. A write-down to net realisable value is often the difference between accounts that describe the business and accounts that flatter it. Consignment and concession stock is different again — goods held on consignment are not your inventory at all, and recognising them as such inflates the balance sheet.
Where your company requires audited financial statements, stock is usually the highest-risk balance in a retail audit, and attendance at the count is standard procedure. A store that cannot produce a documented count with reconciled variances will have a difficult audit and may face a qualification. We prepare the count file as part of audit readiness.
Reviewed 18 August 2026 by Ahmed Nabil Selim. UAE tax rates, thresholds and deadlines change — confirm the position for your period before relying on it.
Stock and shrinkage — frequently asked questions
A full count at least annually to support the financial statements, plus cycle counts through the year on the lines that matter — high value, fast moving, or historically problematic. Monthly cycle counting on a rotating basis gives most stores the control they need without closing the shop. The annual count should be planned, documented and, where the company is audited, attended by the auditor.
As the difference between the stock your records say you should hold and the stock you actually counted, expressed as a percentage of sales for the period. Measuring it as a percentage of sales rather than an absolute figure lets you compare stores of different sizes and track the trend. The value is in the breakdown — by store, by category, by period — because that is what turns a number into an action.
Goods held on consignment remain the supplier's inventory until sold, so they are not on your balance sheet and buying them is not a purchase. When they sell, you recognise either the full sale with a corresponding cost, or only your commission — depending on whether you are acting as principal or agent, which turns on who controls the goods before transfer. Concession arrangements inside department stores usually run the other way, with the host collecting the cash and remitting net. Both need the principal-versus-agent question answered explicitly, because it changes reported revenue dramatically and therefore changes declared turnover too.
Weighted average cost and FIFO are both acceptable under IFRS; LIFO is not permitted. Most UAE retailers use weighted average because it suits POS-driven systems, though FIFO fits businesses with genuine batch or expiry tracking. Whichever you choose, apply it consistently and be able to explain it — inconsistent valuation between periods is one of the fastest ways to make a margin trend meaningless.
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