LIFO Perpetual (Last In, First Out) in TallyPrime is an inventory valuation method where the cost of the most recently purchased inventory is applied to each transaction as it occurs, in real-time.
Unlike LIFO Annual, which is applied at the end of the year, LIFO Perpetual continuously updates inventory costs and Cost of Goods Sold (COGS) throughout the accounting period.
1. How LIFO Perpetual Works in TallyPrime:
1. Purchases and Sales:
Every time a sale or usage of inventory is recorded, TallyPrime assumes that the most recently acquired inventory is used first.
This means that each transaction is valued at the cost of the latest purchase until those units are exhausted, then the next most recent purchase is used.
2. Real-Time Updates:
The inventory value and COGS are updated in real-time with each transaction, reflecting the cost of the most recent inventory on hand.
2. Detailed Example of LIFO Perpetual:
Let’s consider a scenario with multiple purchases and sales throughout a month:
- Purchase 1: 100 units at ₹50 each.
- Purchase 2: 150 units at ₹55 each.
- Purchase 3: 200 units at ₹60 each.
Now, imagine the company makes the following sales:
- Sale 1: 120 units.
- Sale 2: 180 units.
1. LIFO Perpetual Calculation:
- For Sale 1 (120 units):
- TallyPrime will use the most recent purchase (Purchase 3) first.
- All 120 units will be taken from the 200 units at ₹60 each.
- COGS for Sale 1 = (120 \times ₹60 = ₹7,200).
- For Sale 2 (180 units):
- The remaining 80 units from Purchase 3 are used first.
- Then, TallyPrime will move to the next most recent purchase, which is Purchase 2.
- The remaining 100 units are taken from Purchase 2 at ₹55 each.
- COGS for Sale 2 = ((80 \times ₹60) + (100 \times ₹55) = ₹4,800 + ₹5,500 = ₹10,300).
After these transactions:
- The inventory value will reflect the remaining 50 units from Purchase 2 at ₹55 each and 100 units from Purchase 1 at ₹50 each.
3. Benefits of LIFO Perpetual in TallyPrime:
1. Accurate and Up-to-Date Financial Reporting:
By updating inventory costs in real-time, LIFO Perpetual provides a current and accurate picture of both inventory value and COGS.
2. Tax Benefits in Inflationary Periods:
Like LIFO Annual, LIFO Perpetual can lead to higher COGS and lower taxable income in times of rising prices.
3. Reflects Recent Market Costs:
Helps in matching the most recent costs to revenue, giving a better reflection of the profitability in the current market environment.
4. Drawbacks of LIFO Perpetual:
1. Complexity:
LIFO Perpetual is more complex to manage than FIFO or weighted average methods, particularly in businesses with frequent inventory transactions.
2. Potential Lower Inventory Valuation:
Since older, potentially lower-cost inventory remains on the balance sheet, inventory may be undervalued compared to current market prices.
5. Practical Applications of LIFO Perpetual:
1. Retail and Manufacturing:
Businesses with frequent changes in inventory costs, such as those in retail or manufacturing, might use LIFO Perpetual to manage the impact of cost fluctuations on their financial statements.
6. Conclusion:
LIFO Perpetual in TallyPrime is a powerful inventory valuation method that provides real-time, accurate financial data by always considering the cost of the most recent inventory.
While it offers benefits such as potential tax savings and accurate profit reflection during inflationary periods, it also requires careful management and might result in lower reported inventory values.
Leave a Reply