Because items bought later may be costlier (on account of inflation) than those bought earlier, it becomes important to know which items were sold, and which still remain in inventory.

 

If we have ten machines, bought from Jan. To Oct., each Rs. 1000 costlier, and two from previous year, we have 12 machines costing different amounts.

 

Why is this so important? Because of:

 

Monetary restrictions - inventory has to be given monetary value.

If 5 units were shown as sold, how do we know which ones were sold, and which ones remain, for assigning them rupee values.

 

Rupee values are necessary for the balance sheet.

 

Arbitrary values, arrived at by guess work could severely,

-          Overstate net income, resulting in higher tax, or

-          Understate inventory and expense / cost of goods sold.

 

So inflation (resulting in different batches of same stocks costing differently), monetary restriction and accounting principles, make it important to ascertain which ones were sold, and which ones are left.