Accounting Basics – Interpretation of the FIFO Method

One of the accounting areas is inventory accounting. As a business inventory is usually a rather complex invoice and has different items with different purchase dates, certain accounting methods should be used to properly calculate the cost of supplies sold and the goods sold. In this article we will look at the FIFO (first-in-first-out) accounting method.

The Essence

First, we need to understand that the inventory accounting method is needed, on different days and at different costs. As acquisition and costs differ, it can be a difficult task to calculate the number of goods sold and the balance of goods left. One way is FIFO accounting. Its essence is clearly its name, that is, the first one, which means that in calculating the cost of goods sold, we assume that we first sell the products that we acquired at the earliest time. Thus, firstly, the items included in the inventory will be sold

This is just an assumption for the accounting purpose and you do not have to physically sell those items that you bought the earliest. Often, it may still be impossible, especially if there are small objects or liquid products, such as oil products or cereals.

Practical Examples

The simplest way to inventory bookkeeping is to analyze the practical example. Suppose the company contains the following items in the kit:

• 10 items purchased from $ 4.5 on May 10, 2009
• Purchased at $ 5.6 USD on June 15, 2009
• Purchased at $ 6.9 for July 25,

2009. On July 31, the company sold 12 units. The cost of the FIFO method used for the goods sold is as follows:

First, the products purchased in May are sold at 10 * $ 4.5 = $ 45 and the remaining 2 sold products are those purchased in June and cost 2 * $ 5.6 = $ 11.2. The total value of the goods sold is $ 45 + $ 11.2 = $ 56.2.

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