Stock and manufacturing glossary
FIFO and LIFO
First in, first out and last in, first out
FIFO (first in, first out) and LIFO (last in, first out) are methods of valuing the stock you sell and the stock you hold. FIFO assumes the oldest stock goes out first; LIFO assumes the newest does. In India, LIFO is not permitted for inventory valuation under AS 2 and Ind AS 2.
Why it matters to your business
The valuation method decides two numbers your CA, bank and tax officer look at: the cost of goods sold in your P&L and the closing stock in your balance sheet. When purchase prices move, different methods give different profits for the same sales. Using an accepted method, consistently, keeps your accounts comparable year to year and acceptable to your auditor.
How it works
You buy 100 units at ₹50 on 01-04-2026 and 100 more at ₹60 on 15-04-2026, then sell 120 units on 20-04-2026.
| Method | Cost of the 120 sold | Value of the 80 left |
|---|---|---|
| FIFO | 100 × ₹50 + 20 × ₹60 = ₹6,200 | 80 × ₹60 = ₹4,800 |
| Weighted average (₹55) | 120 × ₹55 = ₹6,600 | 80 × ₹55 = ₹4,400 |
| LIFO (not permitted in India) | 100 × ₹60 + 20 × ₹50 = ₹7,000 | 80 × ₹50 = ₹4,000 |
With rising prices, FIFO shows the lowest cost of sales and the highest profit, and LIFO the reverse. The total is always ₹11,000, the amount you paid; only the split between this period’s cost and closing stock changes. The income-tax computation standard on inventories (ICDS II) follows the same approach, allowing FIFO or weighted average.
Common mistakes
- Switching methods to manage profit. Changing the method in a bad year is exactly what the standards forbid without good reason and disclosure.
- Valuing above what the stock will fetch. Stock is valued at cost or net realisable value, whichever is lower. Old, damaged or near-expiry goods may need writing down.
- Ignoring purchase costs. Freight inward, loading and non-creditable taxes belong in the cost of stock, not in general expenses.
- Back-dated entries left unchecked. A purchase entered late changes the cost of later sales. Enter bills promptly and review stock value after corrections.
Questions about FIFO and LIFO
Is LIFO allowed in India?
No. AS 2, which most Indian SMEs follow, and Ind AS 2, for companies on Indian Accounting Standards, allow FIFO or weighted average cost for goods that are interchangeable. LIFO is not permitted.
Which is better for my business, FIFO or weighted average?
Both are accepted. Weighted average is simpler and smooths out price swings, and it suits most traders. FIFO keeps closing stock close to recent prices, which suits goods with rising prices or short shelf life. Choose with your CA and apply it consistently.
Can I change my valuation method?
Only for a good reason, such as a change required by an accounting standard or one that gives a fairer picture, and the effect must be disclosed in the accounts. Discuss it with your CA before the year starts, not at year end.
Is FIFO valuation the same as selling the oldest stock first?
No. FIFO is a costing assumption for the books. Which physical goods you sell first is a warehouse decision; for items with expiry dates, first expiry, first out (FEFO) is the usual rule.
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