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August 14, 2026·Accounting & Finance·Pasento

What is LIFO?

An inventory method that assumes the newest units are sold first. You will see it written as LIFO, for last in, first out.

Definition

LIFO is the inventory method that treats the newest purchase costs as the ones that leave first. On the books, this is a cost-flow assumption, not a map of which part a clerk actually handed over the counter.

Newest invoice costs leave first when units sell. Older costs can remain on the inventory line.

The bins in the back room can still be emptied oldest-first. LIFO only decides which dollar amounts leave the inventory line.

Where it shows up

Balance Sheet: Related to the inventory line when newer costs remain on hand.

P&L: Related to cost of goods sold, which uses the newest costs first.

See also: Inventory Valuation · Cost Of Goods Sold · Inventory

When you look at your Balance Sheet, inventory sits with the other current assets. Under LIFO, that line can hold older purchase costs for a long time.

The Income Statement does not print the word LIFO. It shows cost of goods sold built from the newest costs first.

If purchase prices are rising, LIFO tends to raise cost of goods sold and leave a lower inventory balance. The two statements still add up to the same total purchase cost.

Cash is not assigned by layer. Cash moved when you paid the vendor, not when LIFO picked the newest cost.

How it works

LIFO works in three steps:

  1. Record each purchase as a layer: Use what you actually paid. The layers stack just as they do under other methods.
  2. Sell from the newest layer: When units sell, LIFO peels costs from the newest layer first. Older layers stay put until the newer ones are used up.
  3. Price what is left: The older layers that remain become the inventory balance. After years of rising prices, that balance can look surprisingly cheap next to what you would pay today.

A physical count still confirms the units on hand. LIFO only prices those units from the leftover layers.

US books may still use LIFO. Many other reporting frameworks do not allow it, so a business that reports outside the United States usually picks a different method.

You apply LIFO to a class of goods and keep using it. It is a standing rule, not a switch you flip when this month's prices look inconvenient.

Example

An auto-parts counter stocks the same oil filter in two buys. March's 40 filters cost $10 each ($400), and June's 40 filters cost $16 each ($640).

In July a shop buys 40 filters. Under LIFO, the June layer leaves first, even if the clerk pulled a March box from the back.

The sale of those 40 filters is recorded:

Debit: Cost of goods sold $640

Credit: Inventory $640

Cost of goods sold is $640, and inventory falls by $640. The remaining 40 filters stay on the Balance Sheet at the March cost of $400.

Assets are lower by the $640 that left. The P&L now holds that $640 as cost against the filter sales.

The counter still has filters on the wall. The method only decided that the newer invoice is the one that hit cost of goods sold.

Common mix-ups

LIFO is not a claim about which physical part left the drawer. It is a rule for assigning cost, even if the oldest box was the one the clerk grabbed.

LIFO is not FIFO. FIFO would send the oldest costs to cost of goods sold first and leave the newer costs on the Balance Sheet.

LIFO is not a tax plan by itself. US books may still use it, and many others do not; the method is a cost-flow rule, not a filing strategy. One link to know: under the LIFO conformity rule, a business that uses LIFO for US taxes generally has to use it in its financial statements too.

Related terms