LIFO and FIFO are two ways to decide which gallons count as sold first for the books. LIFO counts the newest fuel as sold first, FIFO the oldest.
When you buy fuel at different prices over time, all of it mixes in the same tank, but the books still have to put a cost on each gallon you sell. LIFO and FIFO are two rules for doing that. LIFO, last in first out, treats the most recently bought fuel as the first sold. FIFO, first in first out, treats the oldest fuel as the first sold.
The fuel is identical either way. What changes is the cost the books record and, with it, the profit you report. When prices are rising, LIFO charges the higher recent cost against sales, which lowers reported profit and the tax on it. FIFO charges the older, cheaper cost, which shows more profit and more tax.
For a fuel business, where prices move daily and a lot of money sits in inventory, the choice is not a small accounting detail. It shifts your reported cost, your margin on paper, and your tax bill, so it is worth understanding before you pick one and worth being consistent once you do.
In usePrices climbed all year, so on LIFO the jobber’s reported fuel cost ran higher and its taxable profit lower than the same gallons would have shown on FIFO.
Where the word comes from
LIFO and FIFO are accounting shorthand for last in, first out and first in, first out, naming the order in which stock is assumed to be sold.
See also Working capital, Gross vs net gallons