Running a business isn’t just about buying and selling—it’s about what happens in between. Managing inventory is one of the trickiest parts, and the method you choose to value stock can quietly shape your profits, taxes, and even how investors view your business.

That’s where FIFO (First In, First Out) and LIFO (Last In, First Out) come in. They sound like boring accounting jargon, but they’re game-changers for how your financials look. And with modern accounting software—like Tripta accounting software built for small business accounting, textiles, and GST compliance—you don’t need to wrestle with the complexity yourself.

Let’s break it down in plain English.

What is FIFO?

FIFO stands for “First In, First Out.” It means the goods you buy first are the ones you sell first. This makes sense in industries like textiles, food, or fashion—where old stock loses value or becomes obsolete quickly.

👉 Example:

January: Buy 100 meters of fabric at ₹100 each.

March: Buy another 100 meters at ₹120 each.

June: Sell fabric.

FIFO assumes you sell the January batch first. Your Cost of Goods Sold (COGS) is calculated on older (cheaper) stock, while your closing inventory reflects newer (more expensive) purchases.

Why businesses love FIFO:

• Matches real-world inventory flow.
• Closing stock reflects current prices—no surprises.
• Universally accepted (IFRS, Indian GAAP).
• Easy to handle in textile accounting software.

What is LIFO?

LIFO stands for “Last In, First Out.” Here, the most recently purchased stock is sold first.

👉 Example (same as above): LIFO assumes you sell the March fabric first (₹120), then January’s batch.

That makes your COGS higher, profits lower, and taxes lighter. Sounds good, right? The catch is: LIFO isn’t allowed in India or under international accounting standards (IFRS). It’s only valid under US GAAP.

Why some still use LIFO:

• Helps reduce taxable income during inflation.
• Suitable for non-perishable goods like hardware or raw materials.
• But if you’re an Indian business, it’s off the table legally.

FIFO vs LIFO: Key Differences

Real-Life Example

You buy:

100 units at ₹100 in January.

100 units at ₹120 in March.
You are selling 150 units in June.

FIFO Result:

COGS = ₹16,000

Closing Inventory = ₹6,000

Profits appear higher.

LIFO Result:

COGS = ₹17,000

Closing Inventory = ₹5,000

Profits look lower, tax bill lighter.

👉 Bottom line: FIFO boosts profit visibility. LIFO reduces taxes but isn’t an option in India.

Inflation and Its Impact

In India, raw material costs rise often. That’s why:

FIFO → sells older, cheaper stock → higher profits → higher taxes.

LIFO → sells newer, costlier stock → lower profits → lower taxes (but non-compliant here).

For small businesses in India, FIFO is both legal and practical.

Pros & Cons in Simple Words

FIFO Pros:

• Matches how inventory actually moves.
• Shows realistic stock value.
• Globally accepted, fully compliant in India.

FIFO Cons:

• Higher tax bills during inflation.

LIFO Pros:

• Tax savings during inflation.

LIFO Cons:

• Not legal in India.
• Outdated closing inventory values.
• Old stock may sit unsold.

Which Should You Choose?

If you’re a small business owner in India—especially in textiles, FMCG, or pharma—FIFO is the clear winner. It keeps your accounts transparent, compliant, and growth ready.

LIFO might sound tempting on paper, but since it’s not allowed under Indian law, sticking to FIFO keeps you safe and future-proof.

How Accounting Software Simplifies It

The good news? You don’t need to calculate FIFO manually. Modern tools like Tripta accounting software handle it automatically.

Here’s what you get:

• Automatic tracking of inventory batches.
• Instant calculation of COGS and closing stock.
• Smooth GST compliance and audit readiness.
• Time savings, fewer errors, and cleaner accounts.

For textile accounting software users, this means faster reconciliations, better profit tracking, and stress-free compliance.

Final Thoughts

Picking FIFO over LIFO isn’t just an accounting choice—it’s a business strategy. FIFO helps you show true inventory value, stay GST-compliant, and build trust with investors, lenders, and even your own team.

Combine FIFO with a reliable tool like Tripta accounting software, and you’ve got a powerful setup for small business accounting.

👉 The takeaway? FIFO keeps your books clean, your taxes compliant, and your growth story strong.