# What is the meaning of base year?

In accounting, base year may refer to the year in which a U.S. business had adopted the LIFO cost flow assumption for valuing its inventory and its cost of goods sold. Under the dollar-value LIFO technique a company's current inventory is restated to base-year prices in order to determine whether the quantity of inventory has increased or decreased.

Base year is also the initial year in a series of annual amounts. For instance, an accountant might prepare a chart that displays the dollar amounts of a company's sales, gross profit, and net income for each of the years 2020 through 2022. In addition the accountant might add a price index for each line which expresses each line's amounts as a percentage of the 2020 amount. In this example the base year is 2020. Assuming that the sales for the years 2020 and 2021 and 2022 were \$924,000 and \$942,480 and \$979,440, each of these would be divided by the \$924,000 of sales in the base year 2020. The result would be the following index: 100 (for the base year 2020) and 102 (for 2021) and 106 (for 2022).