What it means
When the same item is bought at different prices, you need a rule for the cost of what you sold. FIFO uses the oldest purchase cost first. Accounting Standard 2 and Ind AS 2 allow FIFO or weighted average cost; LIFO (last in, first out) is not allowed in India.
Example
Shree Lakshmi Hardware buys brass taps:
| Date | In | Rate | Out |
|---|---|---|---|
| 2 Oct 2026 | 100 | ₹1,000 | |
| 20 Oct 2026 | 100 | ₹1,100 | |
| 28 Oct 2026 | 120 sold |
| Method | Cost of 120 sold | Closing 80 units |
|---|---|---|
| FIFO | 100 × ₹1,000 + 20 × ₹1,100 = ₹1,22,000 | 80 × ₹1,100 = ₹88,000 |
| Weighted average (₹1,050) | ₹1,26,000 | ₹84,000 |
When prices rise, FIFO shows a lower cost of sales and higher closing stock.
Common mistakes
- Switching methods year to year to manage profit.
- Mixing FIFO valuation with physical picking. Valuation is a costing rule; which box leaves the shelf is a separate choice.
- Back-dated purchase entries, which change the cost of sales already reported.
In MyRecords
Each item has a valuation method, FIFO or moving average, and every stock movement in the stock ledger carries its valuation rate and running value. Back-dated entries are re-valued forward in order, and the Stock vs account value report checks that the stock ledger value equals the stock accounts in the general ledger. Stock ageing counts age first in, first out too.