Average Cost vs FIFO in QuickBooks Desktop: Which Does It Use, and What Changes If You Switch?

Before you start

• FIFO is part of Advanced Inventory, which you buy or subscribe to for QuickBooks Desktop Enterprise. Pro and Premier stay on average cost.
• Talk to your accountant before you switch. The change restates inventory value and cost of goods sold from the start date, so the date is a decision for them.
• Back up the company file and save your current inventory, Balance Sheet and Profit and Loss reports, so you can compare before and after.
• Advanced Inventory Settings grayed out after you bought it? Go to Help > Manage my License > Sync License Data Online, then close and reopen QuickBooks.

For everything else in the add-on, see What Advanced Inventory adds in QuickBooks Desktop Enterprise.

How average cost works in QuickBooks Desktop

Under average cost, QuickBooks keeps one average cost for each item. An item's total value is its average cost times the quantity in stock. When you sell, QuickBooks moves that average cost per unit out of Inventory Asset and into cost of goods sold.

Selling stock you don't have breaks this. QuickBooks costs the sale at the average of the stock you had, or at the Cost on the item, or at $0 if there's neither. The next bill then posts a correction to cost of goods sold. We cover the cleanup in How to fix an inventory valuation mismatch.

How FIFO works in QuickBooks Desktop Enterprise

FIFO means first in, first out. QuickBooks assumes the first units you received are the first ones you sold. Each sale is costed from your oldest stock, so what stays on the shelf carries your most recent costs.

Step 1: Prepare before you switch

1. 1Agree on the FIFO start date with your accountant.
2. 2Run Reports > Inventory > Inventory Valuation Summary, plus the Balance Sheet and Profit and Loss for the periods after that date. Save copies.
3. 3Back up the company file.

Step 2: Turn on FIFO

1. 1Go to Edit > Preferences.
2. 2Select Items & Inventory, then the Company Preferences tab.
3. 3Select Advanced Inventory Settings, then open the FIFO tab.
4. 4Select Use FIFO starting on and enter the start date.
5. 5Select OK, then OK again to close Preferences.

Step 3: Check what changed

QuickBooks recalculates every inventory transaction from the start date you entered. Intuit names three reports that change:

• Inventory valuation reports.
• The Balance Sheet.
• The Profit and Loss, through cost of goods sold.

Rerun the reports you saved in Step 1 and walk through the differences with your accountant.

Switching back to average cost

Clear Use FIFO starting on in the same FIFO tab. QuickBooks goes back to calculating inventory value at average cost. Review the same reports with your accountant afterwards.

Things to know before you choose

• You can start FIFO on any date, but QuickBooks recalculates everything from that date forward.
• Negative inventory can cause incorrect cost of goods sold. Clean it up before you judge either method.
• Costing is only as good as the transactions behind it. Purchases entered late, or without items, throw the numbers off.
• If you move to QuickBooks Online later, Intuit's migration article says both FIFO and moving average cost carry over.

If a move is on the table, see How to migrate from QuickBooks Desktop to QuickBooks Online.

Where QuickBooks Desktop leaves the work to you

• Choosing a method and a start date is an accounting decision for you and your accountant.
• Someone has to compare reports before and after the switch and explain the differences.
• FIFO needs Advanced Inventory in Enterprise, so Pro and Premier users have to change editions to get it.
• Each purchase has to be entered with its items and on time, or neither method gives the right cost.