Fifo method of writing off inventories. What are the Lifo and Fifo methods? Lifo, fifo or average cost: which is better

Organizations must pay sufficient attention to costs. In order to justify expenses, it is necessary to be able to argue the feasibility of their occurrence. Write-off material assets obeys certain rules. Often, entities use the FIFO method in accounting to determine the value of used inventories.

FIFO write-off method

It is almost impossible to imagine a situation in which the purchase of homogeneous groups of goods necessary for work occurs identically over a long period of time. As a rule, materials and raw materials come from several organizations and at different prices. At high turnover, it is not possible to track the cost of a specific unit used for production needs.

Legislation allows you to write off material assets as expenses as they are disposed of, using several methods. According to PBU 5/01 “Accounting for material and inventories» accounting allows the use of several methodologies:

1. Based on the cost of each unit. Suitable for accounting for expensive goods, when it is possible to track the disposal of each batch of materials and inventories.
2. At average cost. Total costs are determined as the ratio of the average price (based on the value of the balance and the amount received) to the total quantity, determined similarly.
3. The FIFO method means that the inventory that arrives first is used initially.

The FIFO rule is also often called the conveyor method. The name is an English abbreviation FIFO, which means First in first out. That is, “first in, first out.”

The method of writing off FIFO in accounting did not change in 2017. Homogeneous inventory continues to be exited in the order in which it was received. Accordingly, materials from subsequent batches are not disposed of until the previous ones are completely used up.

The FIFO principle means that write-off for production or business needs occurs at the actual cost of inventories received first in line. Thus, the cost of inventories received later and not used is included in the cost of closing balances.

FIFO principle in warehouse

Under certain conditions, the FIFO method is preferable in conditions of warehousing of goods. Considering that FIFO in accounting in 2017 is still the priority for writing off initial receipts, inventories leave the warehouse in a strict capitalization sequence. Consignments of newly received homogeneous goods are not written off until the previous ones are used up.

The FIFO method is especially preferable when it comes to perishable goods. The chronological sequence of material write-offs must be confirmed by financial planning, which primarily affects the efficiency of the warehouse. Downtime in production processes due to shortages of raw materials must be avoided. No less important is the task of minimizing losses due to untimely damage to goods.

When writing off materials, which is the FIFO method, the following features are distinguished:

• incoming goods are considered separately by batch;
• the cost of purchased batches of goods is determined;
• preventing product damage;
• minimizing losses through effective use stocks.

The FIFO method in relation to warehouse accounting is relevant for the following types of products:

• perishable goods;
• products with a limited shelf life;
• goods that may become obsolete.

The FIFO method adopted in accounting, an example for writing off listed inventories, allows you to maximally avoid potential losses in the form of damage to inventories. At the same time, in practice, the implementation of this principle can be quite difficult.

Large enterprises with high turnover require a developed inventory accounting system, including monitoring of movement and balances of materials. Great value It also has an organization for the placement of goods and warehouse zoning, which allows for the shipment of time-demanded materials.

FIFO method - calculation example

At the moment, the provisions of PBU 5/01 in relation to the issue under consideration have not changed. The FIFO method in accounting in 2017 is also valid: costs incurred include the cost of the goods used that were originally purchased. The remainder of the inventory is the cost of inventories received later.

In accounting, the FIFO method is an example of the impact of changes in purchase prices on financial result. Thus, when the cost of inventories of a homogeneous group increases, the initial cost will be included in the cost of production low price. Accordingly, product costs will be low and profits will increase.

The FIFO method, an example of which involves reducing purchase prices, will, on the contrary, increase the cost of production, reducing profits.

Example

The company is engaged in the production bakery products. At the beginning of the period, the remaining flour is priced at 20,000 rubles. per ton was 2 tons, only 40,000 rubles. Then the flour came in batches:

• 1st receipt 3 tons for 25,000 rubles;
• 2nd receipt of 5 tons for 30,000 rubles.

During the period under review, 4 tons of flour were consumed.

The organization uses the FIFO method. An example of a write-off calculation would be as follows:

1. The cost of flour put into production is 2 tons for 20,000 rubles and 2 tons for 25,000 rubles. Total 2 x 20,000 + 2 x 25,000 = 90,000 rubles. The average cost of a ton of flour is 90,000/4 = 22,500 rubles.
2. The remaining flour is 1 ton for 25,000 rubles and 5 tons for 30,000 rubles. Total 1 x 25,000 + 5 x 30,000 = 175,000 rubles. The cost of the remainder is 175,000/6= 29,166.67 rubles per ton.

Based on the calculation results, the FIFO method allows you to initially take into account the goods that arrived first in time. The cost of purchasing subsequent MPZ will be taken into account as used.

The LIFO and FIFO methods are used in accounting to determine the order in which goods are released from the warehouse.

FIFO stands for “first in, first out,” which translates to “first in, first out.” This means that the products that arrived first are released first.

LIFO, on the contrary, involves the first sale of the goods that arrived last. The decoding of the abbreviation is “last in, first out,” which translates as “last in, first out.”

Application in accounting

In the absence of an expiration date, there is no significant difference in the product release.

Therefore, the choice in favor of one method or another is often speculative, having significance only within the framework of accounting and bookkeeping.

In other words, knowing the priority allows an accountant or manager, if necessary, to determine exactly which product was released.

When working, the FIFO method is more often used

The FIFO method allows you to track the progress of units of production.

LIFO is used when it is justified by external factors.

An example most often given is a diagram with plates lying in a stack. Since all the goods are the same and practically not subject to spoilage, it makes sense to take the top plate for sales or other needs, i.e. which arrived last.

FIFO write-off method

In certain cases, the use of the FIFO method is purely formal.

That is, the release is made for reasons of the storekeeper or seller, and the goods are taken into account at the price at which the oldest batch was purchased.

FIFO allows you to estimate real expenses and trace the path of investments, and accordingly calculate their return on investment.

The disadvantages of using the method are that it does not ignore inflation or price fluctuations when accounting differs from actual supply. This may lead to incorrect, incorrect calculation of profit and tax base.

Read also Checking the counterparty, how to do this only using the TIN?

Write-off using the FIFO method. Method included as eligible for accounting in paragraph 73 Guidelines on accounting of inventories.

When writing off goods using FIFO, the following rules must be taken into account:

• Based on the cost of the first batch of goods, not only receipts and expenses are calculated, but also the balance in the warehouse.

It is possible to use two types of FIFO - ordinary and modified

IN the latter case the so-called “moving” price is taken into account. This average price, which is recalculated every day at the time of vacation.

• When using standard FIFO, warehouse balances are recorded once at the end of each month.

An example of writing off goods using the FIFO method.
In the first month, there is a balance of 40 ironing boards in the warehouse at a price of 100 rubles. In the second month, units of goods are received, first in the amount of 10 pieces for 110 rubles, then in the amount of 12 pieces for 115 rubles. The storekeeper needs to release 52 ironing boards.

There are two options for calculating their cost:

1. Standard FIFO method. In this case, the cost of the shipment for shipment will be:
40*100+10*110+2*115 = 5330 rubles,

Accordingly, the average price per board will be:
5330/52 = 102.5 rubles.

There will be 10 ironing boards left in stock, with a total cost of 1,150 rubles and a price of 115 rubles per piece.

2. Sliding (modified) FIFO method. In this case, the average price per board is calculated, which is:

(40*100+110*10+12*115)/62 = 104.5 rubles.

At this price, the goods are released, and in fact the buyer receives the ironing boards that arrived at the warehouse first.

The total purchase amount will be:
104.5*52 = 5434 rubles.

The balance in stock will be:
104.5*10 = 1045 rubles.

FIFO accounting software is selected by the enterprise independently

Programs that allow you to coordinate accounting and warehouse records include:

1. BukhSoft,
2. ROUZ, as well as a number of online services,
3. a popular resource is Class 365, with its help you can carry out accounting for free, as well as reflect inventory write-offs with FIFO,
4. Some organizations modify regular MS Excel for the method.

LIFO method of writing off goods

The method was included as acceptable for accounting in paragraph 73 of the Methodological Guidelines for Accounting for Inventories.

Since January 1, 2008, the LIFO method cannot be used. This was approved by order of the Ministry of Finance No. 44n.

This situation is explained by the following factors:

• The desire to bring the Russian accounting system closer to the international one, in which LIFO is not prohibited, but is not actually used.
• The use of the method is unprofitable for entrepreneurs and organizations themselves due to the high level of inflation. LIFO is beneficial when the cost of goods falls, which is more a rarity than a regularity in our country.

The method continues to apply for tax reporting

In this case, the organization can use it if it is beneficial for it. In this case, there will be a discrepancy between financial calculations and tax calculations.

Problems using the LIFO, FIFO, and average cost methods with solutions

The company, which assembles computers from supplied chips, began producing a new type of computer in 2004, the sales of which were uneven, and some of the computers were added to finished product inventories. Let's assume that in 2004 the company produced 4 such computers. But, although they are absolutely identical, the costs for each of them are not the same due to rising prices for components and labor costs:

Let's assume that units 1 and 3 were actually sold.

1) Calculate cost of goods sold and cost of inventory using four methods.

Solution:

According to the average cost method: the average cost of a unit of inventory is 2300/4 = 575 thousand rubles, the cost of goods sold will be 575 * 2 = 1150 thousand rubles, the cost of inventory is 2300-1150 = 1150 thousand rubles.

According to the LIFO method: cost of goods sold is 600+650=1250, the cost of inventory at the end of the year will be 2300-1250=1050

According to the FIFO method: the cost of goods sold will be 500+550=1050, the cost of inventories at the end of the year will be 2300-1050=1250

Accounting for the write-off of materials into production

Materials are released from the warehouse to production for the manufacture of products, performance of work and services, etc. to implement the main activities of enterprises In addition, they are necessary for other economic needs of the enterprise.

The main entries for accounting for the write-off of materials are reflected in table. 1

Table 1

	Debit	Credit
Materials written off from warehouse: to main production in auxiliary production for general production needs for general economic needs to fix the marriage for construction and installation work for sale for operations related to the sale of products	20 23 25 26 28 08 91 44	10 10 10 10 10 10 10 10

Material costs are significant specific gravity in the cost of finished products, therefore the method of determining the cost of materials that are included in the cost of finished products is important. The method of writing off materials for production directly affects not only the cost of finished products, but also the tax base, for example, when calculating taxes on profits and property.

In conditions where prices for purchased materials change during the reporting period, the following options for writing off materials for production are offered:

• average cost method;
• FIFO method;
• LIFO method;
• at the cost of each unit.

Let's look at an example of how materials are written off for production if they were received at different prices during the reporting period.

Example 2.Accounting for the write-off of materials into production.

As of 01.02, the company’s warehouse contained 40 kg of paint at a price of 30 rubles. for 1 kg (initial balance). Within a month, three batches of paint arrived at the warehouse (Table 7.5).

Table 2

Paint lot	Date of receipt	Quantity, kg	Price for 1 kg, rub.
1 2 3	09.02 18.02 25.02	80 100 60	35 40 45

Exercise.Determine the cost of paint remaining in the warehouse at the end of the month when it is written off for production using three methods - at average cost, FIFO and LIFO, if 200 kg of paint is written off for production.

Let's calculate the total cost and quantity of paint purchased.

Batch 1: 35 rub. 80 kg = 2800 rub.

Batch 3: 45 rub. 60 kg = 2,700 rub.
Total: 280 kg for 10,700 rubles.

1. Average cost method.

When using this method, the average cost of 1 kg of paint is determined; for this, the total cost of purchased paint is divided by its quantity:

10700: 280 = 38.2 (r.).

Paint in the amount of 38.2 200 = 7640 (r.) was written off for production, then paint in the amount of 10,700 rub. will remain in the warehouse. - 7640 rub. = = 3060 rub.

2. FIFO method.

When using this method, paint is written off from the first receipt, starting with the balance, according to the first in first out principle, i.e. “first in, first out” until the required amount is collected - 200 kg.

Balance: 30 rub. 40 kg = 1200 rub.
Batch 1: 35 rub. 80 kg = 2,800 rub.
Batch 2: 40 rub. 80 kg = 3,200 rub.
Total written off: 200 kg for 7200 rubles.

When using this method, there will be paint left in the warehouse in the amount of: 10,700 rubles. - 7200 rub. = 3500 rub.

3. LIFO method.

When using this method, they begin to write off paint from the most recent receipt according to the last in first out principle, i.e. “last in, first out” until the required amount is collected - 200 kg:

Batch 3: 45 rub. - 60 kg = 2700 rub.
Batch 2: 40 rub. 100 kg = 4000 rub.
Batch 1: 35 rub. 40 kg = 1400 rub.
Total written off: 200 kg for 8100 rubles.

When using this method, there will be paint left in the warehouse in the amount of: 10,700 rubles. - 8100 rub. = 2600 rub.

We will write all the calculation data in the table. 3

As can be seen from the example solution, when writing off materials at average cost, average indicators and, in general, uniformity in writing off the cost of material inventories to production costs are observed.

Table 3

Material write-off methods into production	Price
	write-off of materials into production	remaining materials in stock
Average cost	7640	3060
FIFO	7200	3500
LIFO	8100	2600

The FIFO method makes it possible to reduce production costs by reducing the cost of materials used.

The LIFO method increases the cost of production, and this, in turn, reduces the value of the remaining inventory. In addition, when writing off materials according to the latest market value the cost of production also reflects fluctuations in market prices, which gives a more realistic idea of ​​the possible profit from the sale of products.

To write off materials for production, the write-off method is also used at the cost of each unit. It is used, for example, to write off precious stones and metals.

The enterprise establishes specific methods for assessing materials attributable to production costs independently, depending on which goals are preferable to it. It should be said that the average cost method is more traditional for domestic accounting. In foreign practice, FIFO and LIFO methods are more often used.

Today there are many various methods accounting, each of which has its own specialization, advantages and disadvantages.

Recently, methods such as FIFO and LIFO have become widespread, which can be used in different situations, and at the same time significantly simplify reporting in certain areas.

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You need to correctly understand which inventory items these methods can be used for and what their key features are.

Definition of terms

Such a difference ultimately directly affects the calculation of taxable profit, and at the same time it can also be used to minimize it.

Methods for estimating reserves

Today, there are several common methods by which the cost of transferred material assets is estimated:

• maintaining reports on the cost of each individual unit;
• according to the weighted average cost of production;
• at the cost of those types of property that were received first in time;
• at the cost of those types of property that were received most recently.

In the vast majority of cases, the procedure for writing off inventories in each individual case is determined differently and directly depends on domestic policy companies, and different types assets can be written off using different methods. It is worth noting that for the same nomenclature the method always remains the same.

Today, in practice, it is the first methods that are most often used, since FIFO and LIFO raise a fairly large number of questions, although not taking them into account would be a serious omission, since, for example, using the same FIFO method will significantly increase the image of the organization in in the eyes of its potential partners or investors.

Application of FIFO and LIFO methods in accounting

If the property does not have any restrictions on shelf life, then in this case there is no significant difference in how the goods will be released, and therefore the choice of certain methods relates only to accounting and bookkeeping, and management has the right independently choose which option you consider more optimal.

By using the FIFO method, it is possible to simplify control over the promotion of certain units of production, while LIFO is usually used only if there are appropriate grounds due to external factors.

As an example of the relevance of these methods, it is customary to cite the situation with plates stacked. All goods belong to the same category and are practically not subject to wear, and therefore it is best to sell or use for other needs the top one, that is, the one that was received last.

First in First out

Translated into Russian this scheme looks like “first in, first out”, that is, an assessment of retired products is carried out, based on the assumption that initially those types of property that were delivered to the income earlier than others are initially provided for production or other purposes. In other words, goods must be released in the same sequence in which they were transferred to the organization’s warehouse.

Each received batch must be displayed in the prepared reporting as a separate independent group if the FIFO method will be used in the future, and this condition is mandatory even if the goods of this item were received at the warehouse earlier.

Which goods and materials apply to

The work of any company is simply impossible without the acquisition of any assets that will then be used in sales and production processes, and the group of this property is called “inventories.”

In this case, reserves mean a certain amount of valuables that can later be used in the form of specialized materials or resources in various processes of production and further resale of commercial products, and in particular, this applies to:

• raw materials and supplies;
• finished products in warehouse;
• unfinished products;
• goods purchased for subsequent sale;
• shipped products;
• expenses that are written off for future periods;
• livestock and other farmed and fattening animals;
• other similar costs or supplies.

Such stocks will be written off from the warehouse every month, used in the process of production or sale of any commodity products, and for maintaining records on such business transactions specialized methods are used, one of which is FIFO.

Peculiarities

In accordance with the rules of this method, the accountant must take for granted that inventories are not used up at one time, but through gradual write-offs, and at the same time they are removed from the warehouse at different points in time. Along with the posting that describes the procedure for transferring material assets, the initial cost of this property should also be written off.

The FIFO accounting method provides for the write-off, first of all, of the oldest supplies, and at the actual cost of production of the first receipt. It is worth noting that not all companies comply with the first condition, that is, the most important criterion is the use of the cost of the initial batch, but in fact, materials received in any receipt can be written off. Accordingly, in the process of writing off the second and subsequent batches, their cost will be determined in accordance with the price of a similar supply.

The FIFO method has a direct connection with the adjustment of market value, and with rising inflation, the use of this method can lead to a significant increase in the amount of income tax, but if the value of inventories decreases, on the contrary, there will be a guaranteed reduction in the income rate.

The employer has the right to change and terminate in the manner and under the conditions established by the Labor Code of the Russian Federation and other federal laws.

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Example of estimating average cost

The company is engaged in capitalizing commodity products at the cost of the supplier, while writing them off from the warehouse using the FIFO method.

By the beginning of the reporting period, there were 100 boxes of nails in the enterprise’s warehouse, the cost of each of which is 100 rubles, that is, the total material assets are worth 10,000 rubles.

Over the course of a month, two new batches arrive at the warehouse, the first containing 200 boxes for 150 rubles each, and the second – 150 boxes for 200 rubles each, and during the same period of time, 200 boxes of nails had to be removed from the warehouse for production purposes.

According to current rules a technique is used in which 100 boxes are consumed at a cost of 100 rubles (for a total amount of 10,000 rubles), while the remaining 100 are already written off at a cost of 150 rubles (for a total amount of 15,000 rubles), and at the end of the month there are 100 boxes left at 150 rubles (for 15,000 rubles) and another 150 boxes of 200 rubles each (for 30,000 rubles).

Last in First out

LIFO is a technique in which inventory accounting is carried out in monetary terms in accordance with the price of the batch that was received or produced last, and those values ​​that were accepted for accounting last must be removed from it first.

By using this method, it is possible to exclude the possibility of reducing the estimated cost of production due to inflation, which allows, even in the event of rising prices, to reflect minimum profit indicators in the reporting, since the cost of inventories will be written off downwards.

Cancellation in tax accounting

To date, the use of the LIFO method is not provided for by current legislation and is not included in the accounting rules. It is worth noting the fact that new legislative norms were also introduced separately, according to which, as of January 2020, the total number of valuation methods is compared with the number of provided valuation methods that can be used in accounting, and the reason for this is precisely the abolition of the method LIFO.

Corresponding amendments were made to paragraph 8 of Article 254 of the Tax Code, as well as to subparagraph 3 of paragraph 1 of Article 268 of the Tax Code, in connection with which today tax and accounting only provides for the use of the remaining three methods: FIFO, at the cost of each unit or at average commodity value.

When not applicable

Now in the process of determining the amount of material costs in the process of writing off any raw materials or materials used during the manufacture of goods, in accordance with accounting policy For tax purposes, a company must use one of the above methods for assessing received materials and raw materials. In addition, in the process of selling purchased commodity products, only these methods are also used for the cost of these goods, which is determined in accordance with the accounting policy.

In the process of selling property rights or any property, the taxpayer has the right to reduce the profit from such operations by the amount of expenses that are directly related to the storage, evaluation, maintenance and transportation of the property being sold.

In case of sale securities As an expense, the price at which these securities were purchased is recognized, calculated in accordance with the method of accounting for securities that was established by the taxpayer - at the cost of each unit or according to FIFO.

If the cost of selling municipal and government securities that are in circulation on an organized market is added to a certain portion of the accumulated coupon income, the amount of profit and expense will be calculated excluding the accumulated coupon income.

Profit from the acquisition of securities in the event of their sale should be taken into account separately in relation to those securities that are and are not in circulation on the organized market. Thus, the use of the LIFO method is not envisaged in a sufficiently large number of cases.

Comparative characteristics

The FIFO method is characterized by extremely high calculation speed and ease of use in accounting, due to which it is often used by those organizations in which production processes are used sequentially, that is, they relate to the manufacture or use of perishable materials. In addition, the advantage is also the increase in the creditworthiness of the company, as well as the ability to attract even more investments or creditors.

The disadvantage of FIFO is that in the case of uneven use of material reserves, inflation is not taken into account, as a result of which the cost of incoming products increases by the percentage of inflation and, accordingly, the financial result is overstated, and further tax costs are expanded.

The LIFO method provides an opportunity to reduce tax obligations, if there are not so many inventories used, and also if the volume of purchased inventories is an order of magnitude greater than those written off.

Reducing tax costs ultimately leads to an increase in the company's cash flow, which significantly increases its financial stability, and also allows the release of new reserves to increase its overall assessed value. It is also worth noting that in the process of calculating the replacement cost of inventories, using this method allows you to better estimate the total amount of economic profit.

However, if frequently liquidated inventories are recorded, the use of this method will significantly increase tax costs, and in addition, there is no way to reflect the actual movement of inventories in production.

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Over the thousand-year history of trade, many methods of accounting for goods have been developed and tested. One of them is the “lifo” method. The scope of its application is not limited only accounting, this concept is widely used in warehouse logistics and sea freight.

The essence of the “lifo” method in different fields of activity

The whole essence of the method is reflected in its name: LIFO is an abbreviation of the English phrase “last in, first out”, i.e. “last to come, first to leave.”

Let's imagine a warehouse into which homogeneous goods arrive in a continuous flow and, at the same time, shipments from the warehouse take place. The cost of each batch of goods received is different, as is the number of units in the batch. And during shipment, an additional condition arises: a previously received batch may not be shipped in full, or goods from different batches, respectively, with different costs, may be included in one shipment. How, in this case, can we determine the cost of the shipped batch? After all, manually marking and counting how many units from which batch and at what purchase price were included in the shipment is too labor-intensive and impractical. If you apply the “lifo” method in this situation, then there is no need for such detail. Regardless of which batch the goods were actually shipped from, when accounting it will be considered that goods from the most recent batch are released first.

In warehouse logistics, the “lifo” method also involves priority shipment of the last-arrived goods. In the field of maritime cargo transportation, this method implies that the cost of transportation includes loading, freight of the vessel, but does not include the cost of unloading at the port of arrival.

In banking, this method accrues interest on the deposit when the client withdraws part of the deposit.

When assessing the value of securities being sold using the “lifo” method, the sales price is considered equivalent to the value of the most recently acquired assets.

An example of calculating cost using the “lifo” method

Let's consider this method using the example of a warehouse: The warehouse has a carryover balance of 8 items. for the amount of 700 rubles. The price per unit, respectively, is 700/8 = 87.5 rubles/piece. Several batches of goods were received on different dates per month.

• batch No. 1 20 pcs. at a price of 90 rubles/piece.
• batch No. 2 15 pcs. at a price of 92 rubles/piece.
• batch No. 3 35 pcs. at a price of 87 rub./piece.

Total received at the warehouse: 20+15+35=70 pcs. 73 units were released at the end of the month. one batch. The cost of goods sold using the “lifo” method will be calculated as follows:

• Batch No. 3, the last one to arrive, will be completely gone - 35 pcs.
• Batch No. 2, which arrived earlier - 15 pieces, will be completely gone.
• Batch No. 1, which arrived first - 20 pcs. will be completely gone.

And only then the missing amount will be taken from the carry-over balance - 3 pcs.

The cost of the shipped batch will be:

(35*87) + (15*92) + (20*90) + (3*87.5) = 3,045+1,380+1,800+262.5 = 6,487.5 rubles. for 73 pcs.

The price per unit will be: 6,487.5/73 =88.9 rubles/piece. The cost per unit of warehouse balance remained unchanged - 87.5 rubles/piece.

The advantage of the “lifo” method is the opportunity to make a profit in an inflationary environment and reduce the tax base for income tax. For this reason, the use of this method in accounting and tax accounting is currently prohibited.