Valuation is an accounting decision with real consequences for profit and tax.
Why valuation matters
When you buy the same product at different prices over time, you need a rule for which cost goes against each sale. That rule affects reported cost of goods sold, gross profit and the value of stock on the balance sheet.
FIFO: first in, first out
FIFO assumes the oldest stock is sold first, so cost of goods reflects older purchase prices and closing stock reflects the most recent ones. It also usually matches how physical stock moves, especially for perishable or dated items.
LIFO: last in, first out
LIFO assumes the newest stock is sold first. In a period of rising prices it shows higher cost of goods and lower profit than FIFO. Whether LIFO is permitted depends on the accounting standards and tax rules that apply to you, so confirm this with your accountant before choosing it.
Batch and serial tracking
Valuation tells you what stock is worth. Batch and serial tracking tells you exactly which units you have, which matters for expiry dates, recalls and high-value goods. Together with automated reorder points, they keep stock accurate and available.
A worked example
You buy 100 units at ₹10, then another 100 at ₹12, and sell 100 units. Under FIFO the cost of goods sold is 100 × ₹10 = ₹1,000, and the remaining stock is valued at ₹1,200. Under LIFO the cost of goods sold would be 100 × ₹12 = ₹1,200, leaving stock valued at ₹1,000. The same sale shows ₹200 less profit under LIFO when prices are rising.
That difference is why the choice must be consistent, documented and acceptable under the rules that apply to you.
How to choose
- Confirm which methods are permitted for your entity under applicable accounting standards and tax law.
- Pick the method that best reflects how stock actually moves in your business.
- Apply it consistently, and disclose any change.
- Make sure your system can report valuation by warehouse, batch and period.
Common questions
Can I change methods later? Changes usually need justification and disclosure. Take advice before switching.
What about weighted average? It is another common method that smooths price changes. Ask your accountant whether it suits you.
Does valuation affect GST? Valuation is an accounting matter and GST depends on transaction value, so they are separate. Confirm specifics with your advisor.
In your ERP
YIKES ERP supports FIFO and LIFO valuation, batch-level tracking, serial barcodes and automated reorder points across multiple warehouses. Related reading: what retail and trading businesses should expect from an ERP and why YIKES beats a traditional ERP.
General information only, not accounting advice.
See YIKES ERP in detail, or talk to the Valueye team about your setup.
