FIFO (First-In, First-Out) values inventory on the assumption that the oldest stock is sold first. In rising-price conditions, FIFO leaves more recent, higher costs in closing stock and charges older, lower costs to COGS, which tends to show higher profit than weighted average.
FIFO suits businesses where physical flow really is oldest-first, such as perishables, and where lot-level cost tracking matters.
A worked example shows the machinery. A trader buys 100 units at ₹100, then 100 more at ₹120. Selling 150 units, FIFO charges the whole ₹100 lot first and then 50 units from the ₹120 lot, giving COGS of ₹16,000. The 50 units left in stock all carry the newer ₹120 cost, valuing closing stock at ₹6,000 — together accounting for exactly the ₹22,000 spent.
Behind the scenes, FIFO systems maintain cost layers: each purchase opens a lot with its own quantity and rate, and every issue consumes the oldest open lot before touching the next. Purchase returns must come out of the correct layer, and backdated entries force the layers to be replayed, which can silently restate the cost of sales already recorded. Importantly, FIFO is a costing assumption — the accounts can follow it even if the storekeeper does not.
Indian accounting standards accept FIFO and weighted average but do not permit LIFO, so FIFO is one of the two choices that survive audit. A frequent confusion is equating batch or expiry tracking with FIFO costing: a pharmacy may pick stock expiry-first for safety while the books cost it oldest-lot-first, and the two orderings need not agree. Both can coexist so long as each is applied consistently for its own purpose.