FIFO vs LIFO stock costing: which should a retail shop use?

By Shenzee Tech · Published 14 October 2026 · 2 min read

When you buy the same product at different prices, your shop has to decide which cost to record when one is sold. That choice is called stock costing, and it changes the profit your reports show.

What FIFO and LIFO mean

FIFO stands for first in, first out. The oldest stock you bought is treated as the first stock you sell. LIFO stands for last in, first out. The newest stock you bought is treated as the first stock you sell.

The goods on your shelf are the same either way. What changes is the cost that is matched to each sale, and therefore your cost of goods sold, your gross profit and the value of the stock you still hold.

A worked example

A shop buys 10 packs of tea in two batches. Batch one: 5 packs at LKR 400. Batch two: 5 packs at LKR 500. The shop then sells 6 packs at LKR 700 each.

• FIFO cost of the 6 packs sold: 5 packs at LKR 400 plus 1 pack at LKR 500 = LKR 2,500. Sales are LKR 4,200, so gross profit is LKR 1,700. The 4 packs left are valued at LKR 2,000.
• LIFO cost of the 6 packs sold: 5 packs at LKR 500 plus 1 pack at LKR 400 = LKR 2,900. Sales are the same LKR 4,200, so gross profit is LKR 1,300. The 4 packs left are valued at LKR 1,600.

Same shelves, same sales, same cash. The two methods simply report a different profit, because prices rose between the two purchases.

Which one should a shop choose?

• Products that expire or go out of date, such as food and medicine, are normally sold oldest first, so FIFO matches what really happens on the shelf.
• When prices are rising, FIFO usually shows a higher profit and a higher stock value than LIFO. When prices are falling, the effect reverses.
• Whichever method you pick, use it consistently so your reports can be compared from month to month.

Which method you may use for tax and statutory accounts depends on the rules that apply to your business. Ask your accountant before you decide.

Why spreadsheets make this hard

Costing by batch means remembering how many units are left in every purchase lot, for every product, after every sale and return. A shop with a few hundred products can do this in a spreadsheet for a while, but one missed update spreads into every later profit figure.

Point of sale software can track each purchase as a lot and apply the costing method automatically at the moment of sale. Nexsora POS tracks stock in FIFO or LIFO lots, so every sale is costed against the right batch and your profit report reflects it.

A short checklist

1. Decide the method with your accountant and write it down.
2. Record every purchase with its date, quantity and unit cost.
3. Cost every sale from the right batch, not from an average you typed in once.
4. Handle returns and stock adjustments against the same batches.
5. Review gross profit by product every month.