Retail Store Accounting Methods 101

Last In First Out (LIFO) Accounting For Retail Business

LIFO, on the other hand, evaluates inventory based on current wholesale market prices rather than what businesses actually paid for products in the more distant past. It typically calculates a higher cost of goods sold and in turn a lower profit margin, meaning this formula is used by businesses that want to lower their tax liability.

The actual formula is the same as is used for FIFO, however the inventory in question is the newest instead of the oldest.

Let’s use a coffee shop as an example. When you first open, you purchase 30 french press coffee makers at $10 each wholesale. A couple months down the line you still have 10 french presses left, and you make another order to replenish your stock. 

Because LIFO gives a somewhat inaccurate and unflattering picture of company profits, it’s actually illegal in most parts of the world. In fact, as of 2022, only the U.S. and Japan allow it as a retail accounting method.