Average Cost vs FIFO: What’s the Difference?
How do you track the value of your business’s inventory? In QuickBooks, you can choose from either average cost of First In, First Out (FIFO). The former is the default value-tracking solution for inventory. FIFO, on the other hand, is an alternative value-tracking solution for inventory. While they will both assign a value to your business’s inventory, they aren’t the same.
What Is Average Cost?
Average cost is a method for tracking the value of inventory. It involves adding up the total cost of all inventory items and dividing that number by the number of inventory items. If you paid $50,000 total for 1,000 inventory items, the average cost of those inventory items would be $50. Average cost is simply the average cost that your business incurred per inventory item. QuickBooks uses average cost to track the value of inventory.
What Is FIFO?
While average cost is the default value-tracking solution for inventory in QuickBooks, you may want to switch to FIFO. FIFO is a method for tracking the value of inventory as well. It assumes that the first inventory items purchased by your business are the first ones sold by your business. If you use FIFO, QuickBooks will assume that first inventory items purchased by your business are the first ones sold by your business.
Differences Between Average Cost and FIFO
There are two methods that you can use to track the value of your business’s inventory in QuickBooks. The popular accounting software supports average cost and FIFO. Average cost is the default method, whereas FIFO is an optional and alternative value-tracking method.
The main difference between average cost and FIFO is that the latter assumes the first inventory items purchased by your business are the first ones sold by your business. Average cost doesn’t take this into account. Instead, it only looks at the total cost of the inventory items and the number of inventory items.
You can switch to FIFO by navigating to the “Advanced Inventory Settings” section in QuickBooks. Next, click “Items & Inventory” and select “Company Preferences.” Under the “Advanced Inventory Settings” menu, you should see an option for “FIFO.” Selecting the “FIFO” option will switch your account from average cost to FIFO. If you decide that you no longer want to use FIFO, you can switch back to average cost by returning to this section in QuickBooks.
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