What is FIFO (first in, first out)?

What FIFO means

When you buy the same item at different prices over a year, you need a rule for which cost goes into cost of goods sold and which stays in closing stock. FIFO assumes the first units bought are the first sold. It usually matches what physically happens, especially for perishable or dated goods.

FIFO and weighted average cost are both acceptable under UK accounting standards (FRS 102) and for tax. LIFO (last in, first out) is not permitted in the UK.

Example

A coffee roaster buys green beans in three batches and sells 900kg during the quarter:

Batch	Quantity	Price per kg	Cost
January	400kg	£6.00	£2,400
February	400kg	£6.50	£2,600
March	400kg	£7.00	£2,800

Under FIFO, the 900kg sold are the January 400kg (£2,400), the February 400kg (£2,600) and 100kg from March (£700). COGS is £5,700. The 300kg left are valued at March prices: £2,100.

Using weighted average cost (£7,800 ÷ 1,200kg = £6.50 a kg), COGS would be £5,850 and closing stock £1,950.

Why it matters for your business

When prices are rising, FIFO gives a lower cost of sales, a higher reported profit and a higher stock value than average cost. That means slightly more tax in the short term, but the difference reverses when the stock is sold.

Whichever method you use, stay consistent from year to year and record it in your accounting policies. Changing method to manage profit is not acceptable. Stock must also be written down if it can only be sold for less than cost, whatever method you use.

Many inventory systems linked to Xero or QuickBooks, and marketplaces' own tools, can track batches automatically, which makes FIFO practical even for small ecommerce sellers.

FIFO and shares or crypto

For Capital Gains Tax on shares and crypto, HMRC does not use FIFO. It uses same-day and 30-day matching, then a pooled average cost (the section 104 pool).

A simple test is whether your stock records can follow batches. If you buy the same item repeatedly at different prices and your system records each purchase separately, FIFO is easy to apply. If not, weighted average cost may be simpler and produces very similar results unless prices move sharply.