It’s a classic concept that pops up in both accounting and computer science. At its core, the difference is simply the order in which items (like inventory or data) enter and leave a system.

Think of it as the difference between a line at a coffee shop and a stack of trays in a cafeteria.

1. FIFO (First-In, First-Out)

In a FIFO system, the items that arrive first are the first ones to be used or sold.

• The Logic: It follows a chronological flow. The oldest items are handled first.

• Real-world Analogy: A grocery store milk shelf. To ensure freshness, the store puts the oldest milk at the front so customers buy it first.

• Data Structures: This is known as a Queue.1

  
  

• Accounting Impact: During times of inflation (rising prices), FIFO results in a lower Cost of Goods Sold (COGS) because you are "selling" the older, cheaper items first.2 This usually leads to higher reported profits.

  
  

2. LIFO (Last-In, First-Out)

In a LIFO system, the most recent items to arrive are the first ones to be moved out.3

• The Logic: It follows a reverse-chronological flow. The newest items are handled first.

• Real-world Analogy: A stack of dinner plates. When you wash a plate and put it on top of the stack, it is the first one someone else picks up to use.

• Data Structures: This is known as a Stack.

• Accounting Impact: During inflation, LIFO results in a higher Cost of Goods Sold (COGS) because you are "selling" the newer, more expensive items first. This reduces taxable income, which is why some US companies prefer it for tax purposes (though it is not allowed under international IFRS standards).

Comparison at a Glance

Would you like me to walk through a quick math example to show how these two methods change a company's profit on a balance sheet?