When you buy the same item at different prices over time, which cost do you use when you sell one? That question is what inventory valuation answers — and the method you choose affects your reported profit, your tax, and the value of stock on your balance sheet. Here are the main methods in plain English.
Why it matters
Prices change. If you bought a product at ₹80 last month and ₹100 this month, and you sell one today, your profit depends on whether you count the cost as ₹80, ₹100, or something in between. Multiply that across thousands of items and the method genuinely moves your numbers.
FIFO (First In, First Out)
FIFO assumes the oldest stock is sold first. The cost of goods sold uses the earliest purchase prices, and your remaining stock is valued at the most recent prices.
- Best for: most businesses, and essential for perishables (food, medicine) where you physically sell oldest first.
- Effect: in a rising-price market, FIFO shows higher profit (older, cheaper costs are expensed) and a higher closing stock value.
Weighted average
This method blends all purchase prices into a single average cost per unit, recalculated as new stock arrives. Every sale uses that average.
- Best for: businesses where units are interchangeable and prices fluctuate often.
- Effect: smooths out price swings — profit sits between the FIFO and LIFO extremes.
LIFO (Last In, First Out)
LIFO assumes the newest stock is sold first. It's worth knowing about, but note that LIFO is not permitted under Indian accounting standards (and IFRS), so most businesses here won't use it.
A quick worked example
You buy 10 units at ₹80, then 10 at ₹100. You sell 10 units.
- FIFO: cost = 10 × ₹80 = ₹800. Closing stock = 10 × ₹100 = ₹1,000.
- Weighted average: average = ₹90/unit. Cost = ₹900. Closing stock = ₹900.
Same purchases, same sale — different profit and stock value, purely from the method.
Pick one and stay consistent
The golden rule: choose a method appropriate to your business and apply it consistently. Switching methods year to year distorts comparisons and raises questions at audit.
Let the software do the maths
Calculating valuation by hand across a live inventory is impractical. CraveInvoice values your stock automatically as purchases and sales happen, so your cost of goods sold, margins and stock value stay accurate without spreadsheets.
Explore inventory software, or read our retail inventory management guide for day-to-day stock-control tips.