Last in, First out (LIFO) is a method used to account for business inventory that records the most recently produced items in a series as the ones that are sold first.
That is, the cost of the most recent products purchased or produced is the first to be expensed as COGS, while the cost of older products, which is often lower, will be reported as inventory.
The U.S. is the only country that allows LIFO because it adheres to GAAP, rather than the IFRS, the accounting rules followed in the European Union, Japan, Russia, Canada, India, and many other countries.
Business Scenario
Assume company A has 10 widgets. The first five widgets cost $100 each and arrived two days ago. The last five widgets cost $200 each and arrived one day ago.
Based on the LIFO method of inventory management, the last widgets in are the first ones to be sold. Seven widgets are sold, but how much can the accountant record as a cost.
Let’s explore how GL entries, COGS and Value entries will be created in Business Central.
Purchase 1: Posting Date 01-Sep-2023 at Price 100 Qty. 5
Purchase 2: Posting Date 12-Sep-2023 at Price 200 Qty. 5
Subsequent to presenting the purchase scenarios outlined earlier, here are the entries recorded in both the Item ledger and the Value ledger
The Unit Cost and Last Direct Cost components closely resemble those of the FIFO costing method.
Sales Invoice: Posting Date 15-Sep-2023 at Price 350 Qty. 7
Based on the LIFO method, the last inventory in is the first inventory sold.
This means the widgets that cost $200 sold first. The company then sold two more of the $100 widgets.
In total, the cost of the widgets under the LIFO method is $1,200, or five at $200 and two at $100.
After posting all the sales scenarios below are the Item ledger entries and Value ledger Entries
You have the option to review the entries related to this sales shipment on the item ledger entries page
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