Dictionary / FIFO
What does FIFO mean in accounting?
Quick definition
Inventory & costingFirst in, first out, term used in costing of inventory; oldest acquisitions are disposed of first. This term guides how bookkeepers record, classify, and explain related transactions in routine financial reporting.
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Examples
You set FIFO; the first bill leaves first
You run a bike shop, and in QuickBooks Online you set the trail helmet to FIFO. On March 4, a bike supplier bills 20 helmets at $36; on May 12 they bill 20 more at $44. On June 9 you sell 8 helmets, and FIFO disposes the oldest lot first, so cost of sales is $288 (8 × $36), not $352. The inventory valuation report should still show leftover March units plus the full May layer. If the sale pulled $44, the item is not costing FIFO.
A year-end worksheet that averaged the layers
You run a print shop. After the December 31 count you build a cost of sales worksheet: you bought 800 black tees from a blank-tee supplier on September 8 at $5.00 and 400 more on November 20 at $3.50, sold 900, and you average the bills to $4.50 so you put $4,050 in cost of sales. That is average cost, not FIFO. FIFO disposes the oldest 800 at $5.00 and 100 of the November lot at $3.50, so cost of sales is $4,350 and leftover inventory is 300 × $3.50. If the item in Xero is set to FIFO, the worksheet has to use those layers.
Why it matters
FIFO is the inventory costing method you pick so the oldest purchase layer leaves first when you sell. You set it on tracked items in QuickBooks Online or Xero and it runs on every sale of that stock; you also use it on a cost of sales worksheet after a count, while a shop with no goods almost never needs it. First in, first out (FIFO) is the same rule spelled out; if you instead average the layers or pull the newest invoice into the sale, leftover inventory no longer matches the method you chose. Check the valuation after a restock at a new price, not just the sale total.
Further reading
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What is FIFO in bookkeeping?
First in, first out, term used in costing of inventory; oldest acquisitions are disposed of first.
When should I use FIFO?
Use FIFO when the transaction facts match its definition and you need the ledger and financial statements to reflect the correct account and period.
What is a common mistake with FIFO?
FIFO is used for fifo entries, while F.O.B covers a related but distinct bookkeeping purpose. Review both terms before posting unusual transactions. A common mistake is applying it by label only instead of checking the underlying transaction details.