FIFO vs LIFO Accounting

Malgorzata Kozicka Malgorzata Kozicka 2015-10-01

We have improved InvoiceOcean's warehouse documentation module by adding support for FIFO and LIFO queueing, including profit margin report generation. Not familiar with FIFO/LIFO? Read on - in this article we'll explain both concepts and give some tips on effective warehouse management.

FIFO and LIFO are two inventory value calculation methods. They are very useful because they take into account the fact that production costs and purchase prices fluctuate over time. In other words, you may have stocks of the same item which were purchased at different times and prices. How to account for this in your balancing sheets?

What is FIFO?

FIFO means that oldest inventory items are recorded as sold first. It's also a general rule which dictates that the oldest inventory is moved first.

FIFO stands for first in, first out. The method can be used for pricing inventoried products and materials. FIFO is also used to determine the value of stock portfolios and investment fund participation units - it helps accountants calculate prices of assets at the time of purchase.

What is LIFO?

LIFO stands for last in, first out - this method involves the pricing and selling of inventory starting with the items that have arrived in your warehouse most recently. According to LIFO, when a product is moved from the warehouse it is reported as bought for the price of your most recent purchase.

In practice most companies prefer to sell old inventory first, which is why LIFO stands in conflict with standard warehouse management. LIFO is mostly useful in periods of inflation and price increases.