FIFO accounting. FIFO method: definition, application

FIFO is a method of accounting for the cost of inventory, in which those batches that were received in the first deliveries are first written off. The name comes from the English expression "first in, first out", which literally translates as "first arrived, first left." This is one of the most commonly used methods by accountants all over the world, to which the material of the article will be devoted.

general characteristics

FIFO - accounting method which is often equated with the natural course of priority. This is easily explained by the fact that the cancellation is carried out strictly within the accepted chronological framework. First of all, the initial consignment of inventory is released for production or sale, at the second stage - the next, etc. The accounting ends at the moment when the last delivery is released from the warehouse.

What property does the FIFO method apply to?

The activities of the enterprise is impossible without the procurement of assets involved in the production and sales cycle. A group of such property is called the inventory of the organization. Inventories are values ​​that can be used in the form of materials or resources for the manufacture of products or further resale. This includes:

• materials and raw materials;
• work in progress items;
• finished products in stock;
• goods purchased for sale;
• shipped goods;
• deferred expenses;
• farmed animals and cattle for fattening;
• other reserves and costs of a similar nature.

Inventories monthly deducted from the warehouse and sent for sale or production. To account for such a business transaction, one of the methods is used, including the FIFO method. The order of registration of the arrival and vacation of the MPZ is regulated by the accounting policy.

Features

FIFO is a method that implies that the accountant takes for granted that the inventories are not spent in an instant, but are written off gradually. Stocks are out of stock at different intervals. Simultaneously with the wiring describing the transmission material assets should be written off the cost of property. At what price should an accountant record retirement stocks?

The FIFO accounting method implies that first of all you need to write off the oldest deliveries at the actual cost of the first receipt. Moreover, not all enterprises follow the first part of the condition, that is, the main criterion is nevertheless the use of the prices of the initial batch for the first vacation in production / sale. In fact, materials can be written off from any parish. For the disposal of the second and further parties, the cost is determined by the prices of the second, third and so on in the order of delivery.

The FIFO method is directly related to changes in market prices. With rising inflation, the use of the method threatens to increase the amount of income tax. In the opposite situation, when the cost of inventories decreases, the rate of obligations on income is guaranteed to decrease.

Areas of use

The calculation of the cost of inventories based on FIFO, which is based only on a chronological framework, makes it possible to successfully apply the method for accounting at enterprises of different industry sectors. For example, it can be used by wholesale trading companies, industrial enterprises, and organizations involved in logistics. The only exception is retail trade, accounting of which requires writing off costs at the exact price of individual products.FIFO is a method that cannot provide this.

Despite the universal approach of the method to assessing the MPZ, not every enterprise is able to function when using it. When deciding to create one or another method of calculating the cost of writing off inventories, you should carefully weigh the positive and negative sides.

FIFO write-off method: advantages

The application of the method will appeal not only to accountants, but also generally positively affect the activities of the enterprise. The most profitable and convenient qualities for maintaining warehouse records according to FIFO are:

• simplification of the collection and reflection of information and high productivity of the accountant;
• perfect compatibility with perishable products;
• ensuring lower stock levels;
• increase in the economic value of the enterprise, which may be beneficial for some categories of legal entities;
• high profit indicators can attract investors and characterize the company's creditworthiness from the best side.

The FIFO assessment method is of irreplaceable practical value: the simplicity of accounting. To fully realize this advantage, consider a conditional example, without numerical data:

The enterprise N received MPZ in small batches. As they are used, the cost of each of them increases, and the stocks themselves spend unevenly. At the end of the month, it becomes necessary to account for the balances from each supply and the amount of stocks consumed. In the usual accounting methodology, the accountant will have to perform many difficult and routine operations: the balances must be calculated for each batch separately, and their value only increases in the next period. FIFO - a method that will allow the accountant to write off balances at the cost of the last batch from the end. The calculations are greatly simplified.

The disadvantages of the FIFO method

No matter how universal the method may seem, it still has its negative aspects, which can affect the activities of the enterprise. These include:

• ignoring inflationary processes when accounting, which leads to an overstatement of the cost of inventories;
• the increase in tax liabilities due to the increase in the size of the financial results of the organization;
• the complexity of the cost planning process;
• deterioration of enterprise management and forecasting future activities.

Perhaps all of the points listed are reduced to the first: insufficient attention to inflation processes. Uneven spending of stocks can lead to write-off at a much lower price of the property, which initially cost many times more. The result is overestimated indicators that confuse management when drawing up a further development plan.

To avoid negative consequences, first of all, do not forget about the features of the method when analyzing the results of financial activities and planning further development of the enterprise. Before applying the FIFO method, it is advisable to carefully consider its need for accounting organizations.

Calculation Rules

FIFO is one of the accounting methods established by the PBU for inventories. To organize the correct process of write-off of reserves, you should adhere to the rules for its application:

• Calculation is subject not only to the received and consumed inventories, but also their stock balances;
• unused stocks are recorded once at the end of the month;
• the company has the right to apply a simple and modified form of FIFO.

The modified accounting method involves the use in calculating the average cost of inventories, which are recounted monthly.

FIFO Method: Calculation Example

It is best to fully understand the essence of the method in a visual way. Consider an example in an enterprise with a given condition: the balance of the MPZ at the beginning of March 2016 amounted to 600 at. e. (60 units of inventory at a cost of 10 cu). The company received 3 deliveries:

• the first was 900 oz. e.(10 units of 90 cu);
• the second - 10 500 at. e. (100 units of 105 cu each);
• the third - 3000 at. e. (20 units of 150 cu each).

Write off inventories and calculate the balance at the end of the month. The calculation results will be placed in the table.

According to the data of the task, in the reporting month there were 190 units of MPZ in the warehouse. As a result of economic activity 180 units were written off sequentially. In the calculation, prices were used starting from the first delivery. In total, at the end of the period, 10 inventory units remained, which should be accounted for at the cost of final delivery (in this case, the third).

The FIFO method is very simple and easy to use, although it does entail some negative consequences. Nevertheless, with a competent approach to establishing the method of stock accounting of the inventories necessary for the enterprise, negative manifestations can be minimized and maximum positive impact on the development of the economic activity of the enterprise can be achieved.