Inventory Expense Recognition

Inventory refers to the short-term assets on a company’s balance sheet; example – a retail clothier’s stock of shirts, pants, etc. 

The expense for inventory is a part of the cost of goods sold. The flow of inventory costs into the accounting system is determined based on the inventory accounting policy, not the physical flow of goods.

The commonly used methods are:

  • Specific cost identification
  • First-in, first-out (FIFO)
  • Last-in, first-out (LIFO)
  • Average cost

Specific Cost Identification

This method is used when the company can identify exactly which items were sold and which ones are still in the inventory. For example, a laptop dealer sells his inventory of laptops based on their serial number.


First-in, first-out accounting method, where the costs of the oldest items in inventory are used to compute the cost of goods sold (COGS) expense on a company’s income statement.

FIFO ending inventory for the balance sheet is calculated based on values of the most recent inventory goods purchased.

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