FIFO (First In First Out) in TallyPrime is an inventory valuation method where the cost of goods is calculated based on the assumption that the first items purchased (or produced) are the first ones to be sold or used.
This method ensures that the oldest inventory costs are charged to cost of goods sold (COGS) first, leaving the most recent costs in inventory.
1. How FIFO Works in TallyPrime:
1. Inventory Purchase and Sale:
- When you record a purchase, TallyPrime keeps track of the cost and date of entry.
- When you sell or use items, TallyPrime will consider the oldest items (first in) as the ones being sold or used first.
2. Valuation Impact:
- The cost of goods sold reflects older prices, and remaining inventory reflects the most recent prices.
- During periods of rising prices, FIFO results in lower COGS and higher ending inventory values, which can lead to higher reported profits.
2. Example of FIFO in Action in TallyPrime:
Suppose a company purchases raw materials at two different times:
- Purchase 1: 100 units at ₹50 per unit.
- Purchase 2: 100 units at ₹60 per unit.
If the company sells 120 units, TallyPrime will allocate the cost as follows:
- 100 units at ₹50 (from the first purchase)
- 20 units at ₹60 (from the second purchase)
The COGS will be (100 * ₹50) + (20 * ₹60) = ₹5000 + ₹1200 = ₹6200.
The remaining inventory will be valued at the latest purchase cost:
- 80 units at ₹60 = ₹4800.
3. Benefits of Using FIFO in TallyPrime:
1. Accurate Profit Reporting:
FIFO aligns with the natural flow of inventory in many businesses, reflecting accurate profit margins, especially in inflationary environments.
2. Consistent with Physical Flow:
In industries like food and retail, where older items are naturally sold first, FIFO provides a realistic inventory valuation.
3. Simpler Record-Keeping:
TallyPrime automates the FIFO process, making it easier to manage and report inventory costs accurately.
4. Practical Application of FIFO:
- Retailers: Use FIFO to ensure older stock is sold first, avoiding spoilage or obsolescence.
- Manufacturers: Helps in valuing inventory accurately, especially when dealing with raw materials whose prices fluctuate.
Conclusion:
FIFO in TallyPrime is a straightforward and effective inventory valuation method, particularly useful in industries where inventory turnover is high or costs are rising.
It provides accurate financial reporting and aligns with the natural flow of inventory, ensuring that the oldest costs are matched against revenue first, leading to potentially higher profits in times of rising prices.
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