Dictionary / First In, First Out (FIFO)
What does First In, First Out (FIFO) mean in accounting?
Quick definition
Inventory & costingThe inventory that is acquired earliest is assumed to be used first; the inventory acquired latest is assumed to be still on hand. This term guides how bookkeepers record, classify, and explain related transactions in routine financial reporting.
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Examples
Oldest lot assumed roasted first
You run a coffee roastery. On February 6, a coffee importer bills 150 pounds of green coffee at $3.80 a pound ($570), posted to inventory; on April 18 the same farm bills another 150 pounds at $4.60 a pound ($690). You roast 150 pounds in late April. First in, first out assumes the February lot was used first, so cost of sales is $570 and the leftover 150 pounds stay on the balance sheet at the April cost, $690. In QuickBooks Online or Xero, the inventory valuation should show remaining units at $4.60, not $3.80 and not a blended $4.20.
Current wax price is not the pour cost
You run a candle studio. On June 2, an oil mill bills 200 pounds of soy wax at $1.85 a pound ($370); on August 11 you buy another 200 pounds at $2.40 a pound ($480) after the mill raised its list. You pour 200 pounds into finished candles in August and want to cost the batch at $2.40 so the job looks tighter. First in, first out assumes the June wax was used first, so the pour hits cost of sales at $370 and the 200 pounds still in the drum are the August buy at $480. Post the pour at $480 and leftover inventory sits at the old $370, the opposite of latest units still on hand.
Why it matters
First in, first out is the inventory flow assumption: earliest units are treated as used first, so leftover stock is treated as the latest purchases. You apply it whenever you close inventory after buying the same goods at more than one cost, every month if you restock often, or only a few times a year if prices stay flat. The assumption puts older costs into cost of sales and newer costs into ending inventory on the balance sheet. FIFO names the costing method; mix this assumption up with a blended unit cost, or treat leftover units as the old invoice, and both the P&L and the inventory line are wrong.
Further reading
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What is First In, First Out (FIFO) in bookkeeping?
The inventory that is acquired earliest is assumed to be used first; the inventory acquired latest is assumed to be still on hand.
When should I use First In, First Out (FIFO)?
Use First In, First Out (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 First In, First Out (FIFO)?
First In, First Out (FIFO) is used for first in, first out (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.