Bought the same item at different prices? How you cost each sale changes your profit and the value of the stock you have left. Compare first in, first out with weighted average.
FIFO profit is £21.60 higher
on 14 units sold, out of 25 bought
| FIFO | Average | |
|---|---|---|
| Sales | £350.00 | £350.00 |
| Cost of goods sold | £96.00 | £117.60 |
| Profit | £254.00 | £232.40 |
| Stock left, at cost | £114.00 | £92.40 |
Guide
FIFO assumes you sell your oldest stock first. Each sale takes the cost of the earliest batch until it runs out, then the next. When prices rise, FIFO gives a lower cost of goods sold, a higher profit and a stock value close to today's prices.
Average cost gives every unit the same cost: what you paid in total divided by the units you bought. It smooths out price changes, so the profit on each sale is steadier.
Both are accepted ways of valuing stock for small businesses in the UK and many other countries; check yours. What matters most is to pick one and stick with it, because switching back and forth moves profit between years.
Stock you still hold at the end of the year is not an expense yet. A higher closing stock value means a lower cost of sales and a higher taxable profit for that year, and the other way round.
Over the life of the business both give the same total profit. In a single year, FIFO gives a higher profit when prices are rising and a lower one when they are falling.
Last in, first out is not allowed for tax in the UK or under international accounting standards. It is allowed in the US in some cases.
Yes. You need to know how many units you bought in each batch and at what cost, in order. Average cost only needs the totals.
Each unique item simply carries its own cost. FIFO and average cost matter for things you buy more than once, like new stock or repeat lines.
ProfitClerk tracks every purchase batch and costs each sale by FIFO or average, so your profit and stock value are right without a spreadsheet.
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