Your closing stock value depends on which units you assume were sold first, not only on what is on the shelf. This is the stock valuation method: FIFO, LIFO or weighted average. Picking one and changing it carelessly can move your profit and your balance sheet, so here is how each works and how to handle the choice in Inventory.
What a stock valuation method actually decides
Suppose you buy 100 units at ₹50 in April and another 100 units at ₹60 in June. In July you sell 100 units. Physically, the quantity left is the same whichever method you use: 100 units. What changes is the cost attached to the 100 you sold and the 100 you still hold.
That cost flows into two places: cost of goods sold (which decides your profit) and closing stock (which sits on your balance sheet). A stock valuation method is simply the rule for deciding which cost goes where.
FIFO, LIFO and weighted average in plain words
- FIFO (first in, first out): the oldest stock is assumed to be sold first. In the example, the ₹50 units go out, and the stock you still hold is valued at ₹60 each, which is ₹6,000. When purchase prices are rising, FIFO shows the highest closing value and the lowest cost of goods sold.
- LIFO (last in, first out): the newest stock is assumed to be sold first. The ₹60 units go out and what remains is valued at ₹50 each, which is ₹5,000. When prices are rising, closing value is the lowest.
- Weighted average: every unit carries the running average cost of everything held. After both purchases the average is ₹55, so the 100 units left are valued at ₹5,500. It smooths out price swings and usually lands between FIFO and LIFO.
Inventory holds FIFO and LIFO stock as dated cost layers, and weighted average as one running average per item with no layers, so an item on weighted average shows no rows in Cost layers.
Which method can you use for your accounts?
For most Indian businesses, the accounting standard on inventories (AS 2) works with FIFO or weighted average cost, and LIFO is not accepted for statutory financial statements. Ind AS and IFRS also do not permit LIFO. Inventory's own method explainer says the same: LIFO is not permitted under Ind AS or IFRS for statutory reporting.
So treat LIFO in Inventory as a "what if" view, not as the basis for your books. Which method suits you for tax and audit is a decision to confirm with your chartered accountant, because the right answer depends on your business and your constitution.
Where you set the method in Inventory
There are two levels. The company has a default valuation method, which is used by any item whose master does not name a method of its own. An item can also carry its own method on the item master. When Inventory values an item, it uses the item's method if it has one and falls back to the company default if it does not.
The company setting is on the settings screen. You will see it read-only inside the Valuation register's "Method settings" drawer, with a link across to settings if your profile has the settings write permission. This is deliberate: changing the default is not a display option, so it sits behind its own permission and not one click from a report.
A company can also choose its valuation scope: one cost per item across every warehouse, or cost layers kept per warehouse so the same item can carry a different unit cost in each. The scope can be switched only while no stock is held, so decide it early.
Compare the methods without changing anything
The Valuation register shows what your stock is worth on one date, item by item. It replays every posted movement up to the "As at" date, so changing the date asks a different question rather than filtering the same answer. You can also choose how it values the stock: As per item master, FIFO, LIFO or Weighted average.
"As per item master" is the basis your books are kept on. The other three are simulations of what the same stock would be worth if that single method were applied throughout. The Method comparison page puts them side by side with the variance against your item master basis. Nothing there posts an entry or alters any item's configured method. If you want a longer walkthrough of this screen, see our help article on how to compare FIFO, LIFO and weighted average stock value in Inventory.
Watch the "Applied" column. It shows the method actually used for that row, and it can differ from the one you asked for when the requested method cannot be honoured, for example for an item with no cost layers.
Changing the method: what Inventory makes you confirm
Because a valuation method re-costs history, Inventory does not let you change it silently once stock movements exist.
- For one item: if the item has posted stock movements, the change is refused until you confirm it with valuation_method_recost. When you confirm, Inventory queues a recalculation for that item from the start of its history.
- For the company default: if any stock movements are posted, changing the default also needs the same confirmation. The refusal tells you how many posted movements are affected and warns that reported closing values will move, including for dates in a locked period.
One detail matters: confirming a change of the company default does not start a recalculation by itself. Because every item that inherits the default is affected, the figures stay as they were until a recost is run, and the message tells you to run one. Plan the change, confirm it, then run the recost and check the Valuation register against your books before you close the period.
A safe routine for choosing and changing a method
- Pick the method with your CA at the start of the financial year, and keep it the same year to year unless there is a good reason.
- Set the company default, and override it on an item master only where an item truly needs different treatment.
- Use the Method comparison page to see how far FIFO, LIFO and weighted average sit from your basis before you commit.
- If you must change a method on live data, do it right after a period is closed and reconciled, not mid-month.
- After a recost, compare closing stock with your ledger and with a physical count. Our guide to physical stock verification and reconciling stock with books shows how.
Key takeaways
- FIFO, LIFO and weighted average change the cost of goods sold and closing stock, not the quantity on hand.
- LIFO is not accepted for statutory reporting under Ind AS or IFRS; confirm what applies to you with your CA.
- Inventory uses an item's own method first and the company default otherwise.
- Method comparison is a what-if view; it changes nothing.
- Changing a method on an item or company with posted movements needs an explicit confirmation, and a company-wide change needs a recost run afterwards.
Related reading: reorder points and safety stock in Inventory and the half-year book closing checklist.
If you track stock across items and warehouses, Aicountly Inventory lets you see your valuation under each method and keep one consistent basis for your books.
