LIFO Annual (Last In, First Out) Valuation Method in TallyPrime is an inventory accounting method where the cost of the most recently acquired items is used first when valuing inventory sold or used within a year.
The remaining inventory is valued based on the oldest purchase prices.
1. How LIFO Annual Works:
1. Annual Purchase Record:
Purchases made during the year are recorded and stacked in chronological order, but the valuation at year-end is based on the most recent costs.
2. Valuation Impact:
In an inflationary environment, LIFO typically results in higher COGS (Cost of Goods Sold) and lower ending inventory values compared to FIFO, which can reduce taxable income.
2. Example of LIFO Annual in TallyPrime:
Let’s consider a company that purchases inventory over the course of a year:
- Purchase 1 (January): 100 units at ₹50 each.
- Purchase 2 (July): 100 units at ₹60 each.
- Purchase 3 (December): 100 units at ₹70 each.
At the end of the year, if the company sells 150 units, LIFO Annual will assume that the last 150 units purchased (starting from December) are sold first.
Cost Calculation:
- 50 units from the December purchase at ₹70 each = ₹3,500
- 100 units from the July purchase at ₹60 each = ₹6,000
Total COGS: ₹9,500
The remaining 50 units from the January purchase would be valued at ₹50 each, totaling ₹2,500.
3. Benefits of LIFO Annual:
1. Tax Benefits:
During times of rising prices, LIFO Annual can result in higher COGS and lower taxable income.
2. Matching Current Costs to Revenue:
By matching the most recent costs to current revenue, LIFO provides a more realistic picture of profitability.
3. Inventory Management:
Useful in industries where newer stock is more relevant or where old stock remains unsold for longer periods.
4. Drawbacks:
1. Lower Ending Inventory Value:
Inventory on hand may be valued lower than its current market value, potentially underreporting the value of assets on the balance sheet.
2. Complex Record Keeping:
LIFO can be more complex to manage, especially when prices fluctuate frequently.
5. Application of LIFO Annual in TallyPrime:
LIFO Annual is best suited for industries where costs are rising, and the company wishes to reduce taxable income by reporting higher COGS.
However, it requires careful management and may not reflect the true value of inventory in certain situations.
6. Conclusion:
The LIFO Annual valuation method in TallyPrime provides businesses with a way to match the most recent inventory costs against revenue, potentially reducing taxable income in periods of inflation.
While it offers tax advantages, it also requires more complex record-keeping and may result in lower reported inventory values.
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