Inventory valuation: FIFO and weighted average
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Updated 30 Sep 2026
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AI summary
How to put a value on closing stock, with a worked example.
4 sections
Allowed methods
Under Indian accounting standards (AS 2 / Ind AS 2), use FIFO or weighted average cost. LIFO is not allowed. Whatever method you choose, value stock at cost or net realisable value, whichever is lower.
Example
| Date | Purchase | Qty | Rate |
|---|---|---|---|
| 1 Apr | Opening | 100 | ₹50 |
| 10 Apr | Purchase | 200 | ₹56 |
| 20 Apr | Sale | 180 | — |
FIFO (first in, first out): the 180 sold come from 100 @ ₹50 and 80 @ ₹56. Closing stock = 120 @ ₹56 = ₹6,720.
Weighted average: total cost (₹5,000 + ₹11,200) ÷ 300 units = ₹54 per unit. Closing stock = 120 × ₹54 = ₹6,480.
What goes into cost
- Purchase price, freight inward, customs duty, loading
- Not GST if you claim input credit
- Not selling costs or abnormal wastage
Why it matters
Higher closing stock means higher profit. Change the method only for a good reason, and disclose the effect. Banks and auditors check that stock in the books matches the stock statement given for loans.
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