The FIFO (First In First Out) accounting formula is a method for tracking inventory purchases and sales. It assumes that the goods sold or purchased first have been the first goods to be recorded in the business. This approach is based on the notion that businesses sell and restock their inventory at a consistent rate, which allows them to properly forecast when products will need to be replaced. Essentially, FIFO ensures that goods are recorded within the correct period of purchase or sale and that goods are not mixed up. By keeping track of goods in this manner, businesses can more accurately match revenue streams with expenditure and generate accurate financial reports.