Dictionary / LIFO
What does LIFO mean in accounting?
Quick definition
Inventory & costingLast in, first out; an inventory valuation method. This term guides how bookkeepers record, classify, and explain related transactions in routine financial reporting.
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Examples
A sale after the mill raised the box price
You run a flooring shop. On February 3, a hardwood mill bills 200 boxes of white oak at $52 a box; on May 19 they bill 200 more at $61 after a mill increase. On May 28 you sell 50 boxes, and LIFO pulls the newest lot first, so cost of sales is $3,050 (50 × $61), not $2,600. Ending inventory should still show all 200 February boxes plus 150 leftover May boxes. If the sale pulled $52, the item is costing FIFO, not LIFO.
Year-end leftover valued at the last invoice
You run a landscape-supply yard. After the December 31 count you have 40 bags of polymeric sand left: you bought 120 bags from a landscape supplier on August 11 at $8.50 and 80 more on November 2 at $11.00, then sold 160. You value leftover bags at $11.00 because that is the last invoice, which is FIFO leftover math. Under LIFO the newest bags left first, so cost of sales is 80 × $11.00 plus 80 × $8.50, and the 40 bags still on the pallet are the older August layer at $8.50. QuickBooks Online will not switch an item to LIFO; keep a layer worksheet and let a CPA handle the election if you need this method.
Why it matters
LIFO is the inventory valuation method that treats the newest purchase layer as sold first, so leftover units stay at older costs. You only use it if you carry stock bought at more than one invoice price and you chose this method; a service business with no goods never posts it. It runs on every sale if the books actually cost newest-out, or once a year on a worksheet if day-to-day tracking uses FIFO or average cost. Swap the layers and both cost of sales and the inventory line on the balance sheet flip: rising prices make the sale look cheaper than it should and leftover stock look newer than it is. A CPA handles whether you can elect LIFO; do not flip a software setting and assume the tax method followed. After a restock at a new price, check which unit cost left with the sale and which layer is still on the shelf.
Further reading
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What is LIFO in bookkeeping?
Last in, first out; an inventory valuation method.
When should I use LIFO?
Use LIFO 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 LIFO?
LIFO is used for lifo entries, while Lapse 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.