FIFO is the Russian version of the abbreviation of the English expression "First in, first out", "First in, first out". In accounting, this abbreviation means the method of accounting for the cost of goods, in which the first batches that arrived are unsubscribed in the first place. Thus, the natural sequence of the cycle is respected.
Deciphering the concept of the FIFO method reflects the whole essence of the work of production or sale, when the initial batches are released forward, at the next stage - the next batch, etc. Inventory accounting is completed during the period when the final batch is poisoned from the warehouse.
Property to which the methodology is applied
Each enterprise purchases assets at the beginning of the production cycle. This property is called the reserves of the organization - material and production. That is, the values used in the form of materials for the production of products or their subsequent resale.
What are the values:
- raw material
- work in progress
- manufactured products
- goods bought for resale
- goods shipped
- planned expenses for future periods
- livestock raised
- similar supplies and waste of the same nature
Inventories are regularly written off from the warehouse and transferred either for sale or for production. In order to take this expense operation into account, the accounting department can apply the FIFO method (most often, this is how accounting is kept).
The arrival and delivery of goods is regulated only by the accounting policy, and the fact of slow consumption of inventories is taken into account. Stocks are dispatched from the warehouse unevenly and at different time intervals. By writing off material assets during their transfer, the accountant also writes off the cost of this property. The method suggests writing off the oldest deliveries in advance at their actual cost (at the time of the first arrival). However, some businesses ignore the first part of the recommended condition, i.e. the main criterion is the indication of the price of the initial batch at the first shipment to production or for sale. In this case, in fact, raw materials or materials from any parish may be written off.
To write off and dispose of the second and subsequent lots, the cost price is entered at the prices of the second and subsequent lots in the order of their delivery to the account.
Why is FIFO good?
The assessment of the FIFO method by financiers as a good method is directly related to price fluctuations in the Russian and world markets. The fact is that inflation can grow, and with its growth and when the method is applied, the amount of income tax payments will increase. If the cost of inventories decreases, so does the income tax rate.
The use of this method is comfortable not only for an accountant, but in general can have a positive effect on the entire work cycle of an organization. The most beneficial qualities for warehouse accounting of FIFO technology:
- ease of collecting and displaying data
- simplification of the work and calculations of the accountant
- consistent and convenient turnover when selling a perishable product
- consistent decrease in the volume of stale warehouse stock
- an increase in the estimated value of the enterprise (which means that favorable conditions are created for attracting investments and the image of a creditworthy organization is formed)
Calculation example
In the presence of 370 clay baking pots for 100 rubles. Delivered in two batches of 500 pots. The first batch is 95 rubles, the second - 90 rubles per pot.
They sold 1,100 clay pots for 150 rubles / piece.
How to calculate profit using the FIFO method? The first are those that were available, 370 pots of 100 rubles each. Total RUB 37,000 The second are written off 500 pots for 95 rubles / piece. - minus RUB 47,500 The remaining 230 pots for 90 rubles / piece. written off in the third order for 20,700 rubles.
1100*150–(37000+47500+20700)=59800.
This amount is the indicator of profit in rubles from the sale of all three consignments of goods. These are the calculations using the FIFO accounting methodology.
