For most small retailers, average cost is the right choice. It’s simpler to manage, it’s what QuickBooks Online calculates automatically, and it gives you reliable cost of goods sold numbers without extra manual work on your end.

Here’s the difference between the two methods. FIFO (first in, first out) assumes you sell your oldest inventory first. If you bought 10 units at $5 and then 10 more at $7, FIFO says the first units you sell cost $5 each. Average cost takes all your inventory and averages the purchase prices together. In that same example, your average cost per unit would be $6. Both are acceptable under IRS rules for small businesses.

FIFO can give you a more precise picture of your actual costs when prices change significantly between purchase orders. If you’re buying products whose wholesale prices swing a lot, FIFO tracks those changes more accurately. But for most small retail shops selling goods with relatively stable pricing, the difference between FIFO and average cost on your bottom line is small enough that it doesn’t justify the extra work.

The practical reality is that QuickBooks Online uses average cost as its built-in inventory method and doesn’t offer FIFO natively. If you want FIFO in QBO, you’d need to track it manually or use third-party inventory tools that integrate with QuickBooks. That’s added complexity and cost that most small retailers don’t need. Since QBO is the platform most of our Wisconsin small business bookkeeping clients are on, average cost is usually the default and the right fit.

What matters more than your method choice is consistency. The IRS requires you to use the same inventory method from year to year. If you start with average cost, stick with average cost. Switching later requires filing Form 3115 for a change in accounting method, which adds paperwork and can trigger adjustments to your taxable income. Pick a method when you set up your books and don’t revisit it unless there’s a strong reason.

There are a few situations where FIFO might be worth the extra effort. If you sell perishable goods where you literally move oldest stock first and prices fluctuate seasonally, FIFO more closely mirrors what’s actually happening. Or if your product costs are rising significantly over time and you want your cost of goods sold to reflect earlier, lower purchase prices. For most boutiques, gift shops, and general retail operations, neither of these situations applies in a way that would meaningfully change your financial picture.

If you’re just getting started with inventory accounting or cleaning up how you’ve been tracking it, average cost in QuickBooks Online is the straightforward path. Focus your energy on accurate counts and consistent recording of purchases rather than debating valuation methods. Knowing exactly what you have on hand and what you paid for it matters far more to your profitability than whether you’re averaging costs or layering them by purchase date.