FIFO
Meaning, Example & Stock Valuation Rules
5 min readFIFO, short for first in, first out, means the stock that came in first is used or sold first, and in the accounts it means the oldest purchase prices are charged against sales first.
What Is FIFO?
One meaning is about which packet a cook picks up, the other about which price your accountant uses. In India, both have a rulebook: FSSAI for the storeroom and the ICAI’s AS 2 for the books.
Which batch goes out first Batch A In: 1 October Expires: 20 November Batch B In: 8 October Expires: 28 November Batch C In: 15 October Expires: 12 November FIFO uses this first FEFO uses this first FIFO goes by arrival date and FEFO by expiry date, so a later batch can go out first.FIFO in the Storeroom
In the storeroom, FIFO is plain stock rotation: new deliveries go behind the old, so the oldest is nearest to hand.
FSSAI’s December 2024 advisory quotes sub-part 5.2.5 of Schedule 4, the part written for licensed businesses: storage of raw materials, ingredients, work-in-progress and cooked or packaged food “shall be subject to FIFO (First in, First Out), FEFO (First Expire First Out) stock rotation system as applicable”.
That rule has since changed. An FSSAI amendment notified on 23 June 2026 replaced sub-part 5.2.5, so storage “shall be subjected to First in First out, First Expire First Out, which shall not be applicable to retailers”. Licensed manufacturers, distributors and kitchens still follow it, while a retail shop no longer has to.
Our post on the FIFO food storage method covers how kitchens label and shelve for it.
FIFO in the Accounts
In the books, FIFO is a cost formula. It assumes the earliest purchases went out first, so the cost of goods sold carries the older prices and closing stock carries the latest ones.
Under AS 2, one of ICAI’s accounting standards, items that are ordinarily interchangeable are valued on FIFO or weighted average cost. Items that are not interchangeable, such as custom-made pieces, use specific identification. LIFO, which charges the newest prices first, is not permitted, and whichever formula you pick has to be applied consistently. Our page on unit cost compares FIFO with weighted average.
FIFO vs FEFO
Food and pharmacy businesses often need the second rule more than the first.
| Aspect | FIFO | FEFO |
|---|---|---|
| Rule | Oldest stock out first | Earliest expiry out first |
| Decided by | Date received | Date of expiry |
| Fits | Stock with similar life | Batches expiring at different dates |
| Example | Sacks of rice | Milk, medicines, packaged snacks |
The two usually agree. But they part ways when a later delivery carries an earlier expiry date, which happens more often with packaged goods than anyone would like, and then FEFO wins. Each batch’s batch number and shelf life are what make the call possible.
FIFO Example
A dry fruit shop in Srinagar’s Lal Chowk buys 40 kg of almonds on 1 October 2026 and another 60 kg on 15 October, as pre-Diwali demand pushes the price up. It sells 70 kg during the month, and the table splits the 15 October delivery into what sold and what is left.
| Batch | Kg | Rate per kg | Where it goes |
|---|---|---|---|
| 1 October | 40 | Rs.770 | All sold |
| 15 October | 30 | Rs.845 | Sold |
| 15 October | 30 | Rs.845 | Closing stock |
Note: this is an invented example for illustration only. The shop, prices and quantities are not real.
Under FIFO the cost of the 70 kg sold is Rs.56,150, and the 30 kg left is valued at Rs.25,350, the latest price. Weighted average would put both purchases together at Rs.815 a kg, giving a cost of sales of Rs.57,050 and closing stock of Rs.24,450. So in a month of rising prices, first in, first out shows Rs.900 more profit on the same almonds.
Where Stock Rotation Breaks Down
The rule is simple, but the shelf usually decides whether it holds:
- New stock stacked in front. Whoever unloads the delivery puts the fresh cartons where there is space, which is usually the front.
- Batches mixed in one bin. Once old and new almonds share a tin, nobody can tell which is which.
- No record of arrival dates. If nobody notes when each batch came in, there is no way to show at a stock count or an FSSAI inspection that the oldest went first.
And a sign on the wall fixes none of this. A habit of shelving new stock behind old does, backed by a stock and inventory management template noting when each batch arrived.
Keep FIFO Honest With a Batch Record
A batch record is what turns the rule from a habit into something you can check. Petpooja Invoice lists Batch & IMEI/Serial Stock Tracking and FIFO/FEFO Stock Management in its plan table, alongside real-time inventory management.
Check this week whether the oldest batch of your five fastest-expiring items really sits at the front.
Frequently Asked Questions
Can a business switch from FIFO to weighted average?
It can, but not casually. AS 2 expects the chosen formula to be applied consistently, so a switch needs a sound reason and a word with your CA first.
Does FIFO change the GST on a sale?
No. On an ordinary sale, GST is charged on the sale value, not on what the stock cost you. The method only changes the cost and profit shown in your books.
Does the accounting method have to match how stock physically moves?
Not exactly. In the books, it is a cost assumption about which price goes to sales. Many businesses still pick the formula closest to how their stock really moves, so the numbers make sense to whoever reads them.
Does FIFO apply to restaurants?
In the storeroom, yes, and licensed kitchens fall under the FSSAI rule. In the books it applies only if the restaurant chooses FIFO, since weighted average is equally allowed.