Learn how QuickBooks Online accounts for inventory and why it’s different from QuickBooks Desktop.
QuickBooks Pro/Premier use average cost to calculate your inventory costs. QuickBooks Online uses first-in-first out (FIFO). QuickBooks Enterprise can use either method.
For most businesses, FIFO shows the biggest gross profit and highest final inventory value on the balance sheet. It also shows how inventory flows through your business.
Step 1: Set your inventory start date
You’ll need to pick a FIFO inventory date before you move your data. Once you set the inventory start date, you can’t change it. Also, you can’t edit any transactions before this date.
Any transactions on or after this date show as FIFO. We recommend you use the first day after your company’s last tax filing period. This way you won’t have to file amended forms.
Examples of FIFO inventory calculations
Let's say you have an inventory item with a cost that changes over time. You don’t resell this item directly, but use it to make your final sellable product.
| Purchase date | Quantity | Cost per item | Cost to business |
| 1/1/18 | 100 | $0.70 | $70.00 |
| 1/15/18 | 125 | $0.73 | $91.25 |
| 2/1/18 | 150 | $0.78 | $117.00 |
| 2/15/18 | 200 | $0.80 | $160.00 |
| Totals | 575 | $438.25 |
In this example, we’ll use 200 of this inventory item to make your final product your customer already bought. We’ll compare the average costing method (QuickBooks Desktop) to FIFO (QuickBooks Online) for this inventory item.
| Average Cost | FIFO |
| Calculate the average: ($70.00 + 91.25 + 117.00 + 160.00) / (100 + 125 + 150 + 200) = $0.76 per item Multiply the average cost by quantity sold to determine Cost of Goods Sold: $0.76 x 200 items sold = $152 | Calculate Cost of Goods Sold for the first purchase date (1/1/22): $0.70 x 100 items sold = $70 Multiply the remaining 100 items by the cost of the next purchase date (1/15/22): $0.73 x 100 items sold = $73 Add the values of both purchase date to determine Cost of Goods Sold: $73 + $70 = $143 |
For more info, check out the QuickBooks Blog post, Average Cost vsFIFO.
Step 2: Let the IRS know you've changed your inventory cost method
The IRS requires you to commit to an inventory valuation method the first year you file a business tax return. You'll need to file Form 3115 for the tax year you first implement your new inventory cost method (the FIFO inventory start date you select).
Learn how to complete this form and send it in by the due date for your business tax return. For the current tax year, you must file by October 15. This is the due date of your return with an automatic 6-month extension.
If you have questions about this form, consult your tax advisor or accountant.
