FIFO stands for First In First Out. With the FIFO restaurant method of accounting, you record your inventory at the cost of your most recent purchase and is usually preferred by restaurants when valuing their inventories because it gives them a more accurate picture of their marketable inventory given that they are dealing with food items which have limited shelf lives.

Another reason why many restaurants prefer using this method is because it can help reduce or eliminate any potential write-offs due to spoilage/waste. For example, if you have 20 lbs of ground beef left in your freezer and have used only 10 lbs since yesterday, then you will sell whichever item gets used first and journalize the rest as waste. Then, since there's no need to wait for any sort of specific time to pass, you can record the sale right away and journalize the remainder as waste.

What Are The Benefits of Using the FIFO Restaurant Method?

It's easy and flexible with the entry of journal entries

Since you are using a perpetual inventory system, you just need to make sure that you are always aware of how much available inventory is left and then adjust your purchase orders accordingly by modifying the cost basis for whatever items are bought next.

It gives an accurate picture of your marketable inventory since it takes into account the time between purchases

Many business owners forget to take into account when valuing their inventories the effective shelf life (Maximum Permitted Storage Time MPST), which may vary depending on how they store certain products, among other factors. With this in mind, FIFO provides a more realistic assessment of the inventory left over based on how long it has been since your last purchase and makes it easier to figure out exactly when you will need to place a new order.

It can help reduce or eliminate potential write-offs due to spoilage/waste

As mentioned before, many restaurants prefer this method because it prevents them from writing off unnecessary amounts of food which would otherwise have gone bad if not sold for whatever reason. Some also choose to do so to minimize their losses within the business operation as a whole. Having quality control measures with your suppliers is much more cost-effective than having little/no quality control measures internally with your employees. By minimizing waste and record-keeping, you are effectively maximizing profits, leading to increased cash flow and a healthier bottom line.

The Alternative - LIFO

By contrast, LIFO stands for Last In First Out. With this method, you value your inventory based on the most recent purchase. Using this method can lead to overstating your marketable goods because it assumes that everything inside your freezer is available for sale and will be sold in due time. It can also result in write-offs (due to spoilage/waste) based on items purchased earlier rather than those consumed first.

The effects of inflation should be minimized/eliminated.

Since you are valuing your inventory at a cost basis that is higher than what you paid for it, the effects of inflation can be reduced or even eliminated depending on how long the inventory is being held before the sale. Inflation occurs when there is an increase in the general price level of goods and services in an economy over time, reducing consumers' spending power as they may need to pay more for goods and services when their income remains consistent.
The FIFO method is a common accounting practice that can be applied to many restaurant industry sectors. It provides benefits such as easy and flexible entry of journal entries, an accurate picture of marketable inventory since it considers periods between purchases, and minimizes or eliminates potential write-offs due to spoilage/waste. One alternative is LIFO which has its own advantages, including minimizing inflation effects by using higher-cost bases for valuing inventories.