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Inventory accounting: identification, FIFO and LIFO
Inventory records connect goods on hand with the cost assigned to sales. Begin with a reliable count and purchasing history, then discuss the applicable accounting method with your CPA.
This guide describes common bookkeeping practice, not a legal or regulatory requirement.
Last reviewed:
General information, not legal or tax advice.
Identify goods that belong in the count
Publication 538 excludes items such as goods already sold with title transferred, goods consigned to you, business equipment and receivables from inventory. Review ownership and purpose before counting. Keep a separate exception list for damaged items, consigned stock and goods held away from the main location.
Sources: IRS Pub 538
Match actual costs where items can be identified
The IRS describes specific identification for goods whose actual costs can be matched to the items. Keep purchase documents tied to identifiable stock. If identical goods are mixed, review the applicable cost-flow method instead of selecting a convenient invoice cost at the time of sale.
Sources: IRS Pub 538
Understand the order assumed by FIFO and LIFO
FIFO assumes the earliest acquired or produced items are disposed of first; LIFO assumes the latest are disposed of first. Publication 538 describes LIFO as complex and requires Form 970 to adopt it. Discuss method selection with the CPA before changing how inventory values flow through the books.
Sources: IRS Pub 538
Check exceptions against the correct tax year
The supplied 2025-return guidance describes a small-business exception using average receipts of $31 million or less over the prior 3 tax years. It still requires a method that clearly reflects income. Do not carry that dated threshold forward without checking the applicable year with your adviser.
Sources: IRS Pub 334 (for 2025 returns)
Sources: identify goods that belong in the count
Connect counts with purchase records
Tidwell helps reconcile the books and organize supporting schedules for your business decisions. We work with your CPA on tax questions and the financial records they need.