What is FIFO LIFO? Find out the difference between the two here!

In the world of business and accounting, the terms FIFO LIFO are two important methods used to manage stock inventory. Both FIFO and LIFO have their respective roles in regulating how goods are stored and recorded in the company’s accounting books.

The stock inventory method or  inventory management is an important thing that needs special attention because it can affect company operations. This is where the FIFO LIFO method comes into play to optimize inventory management. However, what is FIFO LIFO? What is the difference between the two?

To answer these questions, in this article  TransTRACK will explain what FIFO and LIFO are in full. Let’s listen!

Definition of FIFO LIFO

Before we discuss FIFO LIFO further, it is better to understand its definition first. Here are the definitions of the FIFO and LIFO methods that you need to know:

FIFO Method

FIFO stands for “First-In, First-Out”, which means that the first item to enter the stock will be the first to leave. This FIFO method seems to follow the principle of “first come, first served”. When a company applies the FIFO method, items that arrive first will be sold first, while newer items will remain in stock.

The FIFO method is an approach often used in businesses that sell items with expiration dates, such as food products or pharmaceuticals. This is because FIFO ensures that items with shorter expiration dates will be sold first, reducing the risk of losses due to expired items.

Definition of LIFO Method

On the other hand, LIFO stands for “Last-In, First-Out”, which means that the last item to enter the stock will be the first to leave. LIFO adopts the opposite principle of FIFO, where newer items will be sold first, while older items remain in stock.

The LIFO method is often used in situations where the prices of goods are constantly increasing. As prices increase, LIFO can help companies reduce taxes payable, as it results in lower profits on paper. However, LIFO can make inventory records more complicated as it has to follow the exact order of purchases.

Difference between FIFO and LIFO

The difference between “First-In, First-Out” and “Last-In, First-Out” is a fundamental concept in  inventory management and accounting that affects the way a company records and manages its held items. Let’s discuss the differences between “First-In, First-Out” and “Last-In, First-Out” which are important to understand:

Sales Sequence

The main difference between “First-In, First-Out” and “Last-In, First-Out” is the order in which items are sold. In FIFO, older items are sold first, while in LIFO, newer items are sold first.

Tax and Profit

FIFO often generates higher profits on paper, while LIFO can help reduce tax liabilities by generating lower profits. This may influence the company’s decision on which method to apply.

Price Influence

As the price of goods continues to increase, “Last-In, First-Out” can help reduce the impact of higher prices on profits, while “First-In, First-Out” can result in higher profits. This is an important consideration in industries where item prices tend to fluctuate.

Inventory Management

FIFO tends to be more suitable for businesses that sell items with expiration dates or items with a limited shelf life. While LIFO may be more suitable for businesses with inventories consisting of items with constantly increasing prices.

Accounting Complexity

Compared to the LIFO method, the FIFO method tends to be simpler in terms of accounting. The first item in is the first item out, so there is no need for complicated accounting records related to the order of purchases.

How to Choose FIFO and FIFO Method?

The choice between FIFO and LIFO is an important decision in stock accounting and inventory management. The method chosen will affect how profits are recorded and how the company pays taxes. Therefore, the decision between FIFO and LIFO should be tailored to the characteristics of the business, the type of products sold, the company’s financial goals, as well as considering your business needs.

If you do business in an industry where the prices of goods often fluctuate, LIFO may be the right choice. However, if you sell products with a limited expiration date or shelf life, the FIFO method may be more suitable.

The choice between FIFO and LIFO should be based on the characteristics of your business and the company’s financial objectives. It is important to consult with a qualified accounting professional to ensure the right method is applied according to your needs and applicable regulations.

Utilizing TransTrack Technology as an Innovation in Stock Inventory Management

In the ever-evolving digital era, many companies are looking for more efficient solutions for stock inventory management. Logistic Service Integrator (LSI) from TransTRACK is one of the innovative solutions that can help companies optimize their inventory management processes.

LSI is a technology-based platform that integrates the entire supply chain and provides real-time data on inventory, delivery, and demand. By using LSI, companies can monitor their inventory more accurately, optimize shipments, and reduce inventory costs.

To understand more about how Logistic Service Integrator (LSI) can improve inventory management, you can visit the website  TransTRACK.

This is an explanation of FIFO LIFO and how these two methods affect a company’s inventory management. Hopefully, this article will help you understand the basic concepts of both methods and help in making the right decisions.