Accounting

FIFO (First In First Out)

Inventory valuation method where oldest stock is sold first

Definition

FIFO stands for First In First Out, an inventory valuation method where the goods purchased or manufactured first are assumed to be sold or used first. Under FIFO, the cost of goods sold (COGS) is calculated based on the cost of the oldest inventory, while the remaining stock is valued at the most recent purchase prices. This method is widely accepted under Indian Accounting Standards (Ind AS) and is the most commonly used valuation method for GST compliance. FIFO works particularly well for businesses dealing in perishable goods like food, medicines, and cosmetics, where older stock must be sold first to avoid expiry. During periods of rising prices, FIFO results in lower COGS and higher reported profits compared to LIFO. Most Indian businesses and chartered accountants prefer FIFO because it closely matches the actual physical flow of goods.

How It Works

  1. 1When you buy the same product at different prices over time, FIFO assumes you sell the oldest batch first.
  2. 2Your system maintains a queue of purchase batches ordered by date.
  3. 3When a sale happens, the cost is calculated using the price of the oldest remaining batch. Once that batch is exhausted, the next oldest batch is used.
  4. 4Your closing stock is always valued at the most recent purchase prices, and your cost of goods sold reflects older, usually lower costs.

Example

You purchase 100 units of cooking oil on 1st March at Rs. 120 each, and another 100 units on 15th March at Rs. 130 each. On 20th March, you sell 80 units. Using FIFO, the cost of these 80 units is calculated at Rs. 120 each (the oldest batch), so your COGS = 80 x Rs. 120 = Rs. 9,600. The remaining stock is 20 units at Rs. 120 + 100 units at Rs. 130 = Rs. 15,400.

How Stock Register Handles This

  • Automatic FIFO-based stock valuation — the system tracks every purchase batch and assigns costs in order when you sell
  • Batch-wise stock report shows quantity remaining from each purchase lot with purchase date, rate, and age
  • FIFO cost of goods sold is auto-calculated for accurate profit and loss reporting without manual calculations

Formula

Cost of Goods Sold = Cost of Oldest Inventory x Quantity Sold

Example: If you bought 100 units at ₹120 on 1st March and 100 units at ₹130 on 15th March, then sold 80 units, COGS = ₹120 × 80 = ₹9,600 (oldest batch used first).

Related Terms

Weighted Average CostStock ValuationClosing StockBatch Tracking / Lot Tracking

Related Guides

Stock Valuation Guide

Frequently Asked Questions

Why is FIFO preferred over LIFO in India?

Indian Accounting Standards (Ind AS 2) explicitly prohibit the use of LIFO for inventory valuation. FIFO is preferred because it matches the actual physical flow of goods — most businesses naturally sell older stock first to avoid expiry and damage. FIFO also provides a more accurate balance sheet value since closing stock reflects recent (current market) prices.

How does FIFO affect my profit calculation?

In a rising price environment (which is common due to inflation), FIFO results in lower cost of goods sold (since older, cheaper stock is expensed first) and therefore higher reported profits. This means you may pay more income tax compared to weighted average costing. However, FIFO gives a more realistic closing stock value on your balance sheet.

Can I use FIFO if I do not track individual batches?

For accurate FIFO valuation, you need to track when each lot was purchased and at what price. Inventory software like Stock Register does this automatically — every purchase entry creates a batch record. Without batch tracking, you can approximate FIFO using periodic calculations, but the results will be less accurate, especially if you buy the same item at varying prices frequently.

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