Questions · Inventory and stock
What is FIFO in inventory?
The answer
FIFO stands for first in, first out. On the shelf, it means selling the oldest stock before newer stock. In accounts, it means assuming the units you sold were the earliest ones you bought, so the cost of sales uses older purchase prices and the stock left is valued at the latest prices.
FIFO is used in two related ways: as a rule for how you arrange and sell physical stock, and as a method for working out the cost of what you sold. Small shops usually care most about the first, but both are worth understanding.
FIFO on the shelf
Physical FIFO is a stocking habit. When a new delivery arrives, it goes behind the stock already on the shelf, so the older units are picked first. This matters for anything that ages: packaged food, cosmetics, batteries, seasonal clothing and even boxed goods whose packaging fades.
Without FIFO, staff naturally put new stock in front because it is easier. The old units at the back get older until they expire, fade or go out of fashion, and become dead stock.
FEFO: first expiry, first out
For goods with expiry dates, FEFO is the better rule: sell whatever expires first, even if it arrived later. Usually the oldest delivery also expires first, but not always, for example when a supplier sends an older batch in a newer delivery. Check expiry dates at receiving and shelve by date, not by arrival. The glossary entry on FIFO and FEFO covers both.
FIFO in stock valuation
Prices change between deliveries, so identical units can have different costs. FIFO assumes the units you sell are the earliest ones you bought.
Suppose a shop buys a notebook twice:
| Purchase | Units | Cost per unit | Total |
|---|---|---|---|
| First delivery | 50 | ₹40 | ₹2,000 |
| Second delivery | 50 | ₹44 | ₹2,200 |
It then sells 70 notebooks. Under FIFO:
- Cost of the 70 sold: 50 × ₹40 + 20 × ₹44 = ₹2,000 + ₹880 = ₹2,880
- Stock left: 30 × ₹44 = ₹1,320
Check: ₹2,880 + ₹1,320 = ₹4,200, which is everything paid. When prices are rising, FIFO gives a lower cost of goods sold and a higher closing stock value than an average-cost method would.
Which valuation method your business uses for its accounts is a decision to make with your accountant; tax and accounting rules apply, and the method should be used consistently.
How software handles it
Billing software with batch tracking can apply the rule for you. In BILL OS, stock is held in batches with expiry dates, and sales take stock out first-expiry-first, as described on the inventory and stock page. Staff still need to shelve stock in the same order, so the item a customer picks up is the one the system expects.
Common mistakes
- New stock in front. The most common way FIFO fails in practice.
- Ignoring expiry at receiving. A delivery with a short expiry date should be noticed before it is accepted.
- Mixing batches on one shelf without order. Keep each batch together, oldest or soonest-expiring in front.
For how FIFO fits with buying, counting and reviewing stock, see what inventory management is.
Related questions
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General information, not legal, tax or financial advice. Published by Chameron Digital.