LIFO Full Form

What Is LIFO?

LIFO, short for last in, first out, is a stock method in which the most recently bought units are treated as the first ones sold. In India it often describes how a pile physically moves, but it cannot be used to value stock in the accounts, because the accounting standards for stock, AS 2 and Ind AS 2, allow FIFO or weighted average cost instead.

Which lot leaves first? March lot, Rs.56,300 a tonne February lot, Rs.54,100 a tonne January lot, Rs.52,400 a tonne LIFO newest out first FIFO oldest out first The same three lots, two ways of deciding which one counts as sold first. Indian accounts value interchangeable stock on FIFO or weighted average, whichever lot the loader actually picks.

How LIFO Works on the Floor and in the Books

The term means two different things, and mixing them up causes most of the confusion.

• On the floor, it is simply how goods move. Steel rods, cement bags, bricks and sand are loaded from the top of the heap, so the newest stock leaves first.
• In the books, it is a cost-flow assumption. Whatever physically left, the newest purchase prices are charged to the cost of goods sold, and the oldest prices stay behind in closing stock.

When prices are rising, the second meaning has a clear effect. LIFO charges the dearest units against sales, so profit comes out lower, and it leaves the cheapest units in the stock figure, so the balance sheet shows stock at prices that may be months or years out of date.

A dealer can load from the top of every stack and still value the stock on FIFO or weighted average, and that is exactly what Indian rules expect.

LIFO vs FIFO

FIFO is the method most readers are really comparing it against. Weighted average, the third option, sits between the two.

For perishables the question settles itself, because food and medicine must leave in date order. That is FEFO territory, where expiry, not the purchase date, decides what goes first.

LIFO Example

A TMT steel dealer in Dharwad stocks up ahead of the summer building season in FY 2025-26. It claims input tax credit, so every figure below leaves out GST.

• 10 January: 6 tonnes at Rs.52,400 a tonne
• 7 February: 6 tonnes at Rs.54,100 a tonne
• 5 March: 6 tonnes at Rs.56,300 a tonne

Between 6 and 31 March it sells 12 tonnes at Rs.61,000 a tonne, or Rs.7,32,000 in all. The loaders take bars from the top of the stack, so physically the March and February lots went out. Here is what each method would report on 31 March.

Note: this is an invented example for illustration only.

The same yard, the same sales and the same cash produce three profit figures, with Rs.23,400 between LIFO and FIFO. Even though the bars left LIFO-fashion, the dealer’s books must show either the FIFO line or the weighted average line. Both need the purchase rate of each lot on record, which a stock inventory template keeps in one place.

Why Your Books Cannot Use LIFO

Accounting Standard 2 allows only FIFO or the weighted average cost formula for stock that is ordinarily interchangeable, and specific identification for items that are not.

Ind AS 2, which applies to listed companies (other than those on an SME exchange), to unlisted ones with a net worth of Rs.250 crore or more, and to their group companies, follows the same line. LIFO appears in neither, so whichever of the two standards governs your accounts, it is off the table.

Frankly, the question keeps coming up because US accounting still permits LIFO. This piece on inventory control methods treats it as a textbook concept, not a method to run.

Across the traders we work with, the real decision is FIFO or weighted average. That choice flows straight into closing stock and your profit, and switching later is a change in accounting policy that has to be disclosed.

Track Stock by Batch, Not by the Pile

Whichever way the heap moves, your records have to know which lot is which and what it cost. For restaurants, Petpooja POSS uses item-wise auto deduction to cut stock as each dish sells and gives day-end inventory reports.

For retail businesses, Petpooja Invoice gives real-time stock tracking and purchase reports, and its plans include FIFO/FEFO Stock Management and Batch & IMEI/Serial Stock Tracking.

Take your three most-stocked items, check what each lot cost, and see how much the FIFO and weighted average figures differ.

Frequently Asked Questions