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Financial Reporting · Inventories and agriculture

Inventory Adjustments, Year-End Counts and IAS 2 Disclosures

Updated 11 October 2026 · Fact-checked

Inventory is valued at the lower of cost and net realisable value (NRV) at the reporting date. If the count is on another date, roll the count value forwards or backwards to year end using purchases, sales at cost and returns. Write down to NRV, using post year-end sales evidence, and disclose under IAS 2.

Understand Inventory Adjustments, Year-end Counts and Disclosures

Inventory must be stated at the reporting date. A count is often done a few days before or after year end. So the count figure is not the year-end figure. You must adjust it for movements between the count date and the year-end date.

The movements are simple. Goods received and goods sold change the quantity. Sales are recorded at selling price, but inventory is held at cost. So you must convert sales to cost before you adjust. Use the mark-up or margin given in the question.

IAS 2 says inventory is measured at the lower of cost and net realisable value. NRV is estimated selling price less estimated costs of completion and costs necessary to make the sale. If NRV is below cost, you write the item down. Do this item by item, or by groups of similar items. Do not net a gain on one item against a loss on another.

Evidence after the reporting date can help. If goods are sold after year end at a price below cost, this usually confirms conditions that existed at the year-end. IAS 10 treats this as an adjusting event. A fire or flood after year end that destroys inventory is a non-adjusting event, because the condition did not exist at the reporting date.

The write-down is an expense. It is normally included in cost of sales. IAS 2 requires you to disclose the accounting policy and cost formula, the total carrying amount and amounts by classification, the amount recognised as an expense in the period, the amount of any write-down recognised as an expense, the amount of any reversal of a write-down, the circumstances that led to the reversal, and inventory pledged as security for liabilities. Only where inventory is carried at fair value less costs to sell, such as for commodity broker-traders, must you also disclose the amount carried at that value.

Key rules to remember

Measurement rule
Inventory = lower of cost and NRV
Apply to each item or group of similar items, not to the total.
Net realisable value
NRV = estimated selling price − estimated costs of completion − estimated selling costs
Use the best evidence at the reporting date, including post year-end sales.
Count after year end
Year-end inventory = count value + cost of goods sold between year end and count date − purchases received in that period (+ returns to suppliers; − sales returns at cost)
Sales must be converted to cost first. Deduct only goods that you owned after year end (received and title passed after year end), because they were not yours at year end. Goods already owned at year end stay in the figure.
Count before year end
Year-end inventory = count value + purchases received after count − cost of sales after count
Use cost, not selling price, for sales.
Sales at cost from mark-up
Cost = selling price × 100 ÷ (100 + mark-up %)
With a margin on sales, cost = selling price × (1 − margin as a decimal). For example, a 20% margin gives cost = 80% of selling price.
Write-down entry
Dr Cost of sales; Cr Inventory (statement of financial position) for cost − NRV
A reversal is limited to the original write-down and goes through cost of sales as a reduction.

How to solve Inventory Adjustments, Year-end Counts and Disclosures questions

Use this order for any question on count adjustments, write-downs or disclosure.

  1. 1Identify the count date and the reporting date. Note whether the count is before or after year end.
  2. 2List all movements between the two dates: purchases, sales, returns in and out.
  3. 3Convert sales to cost using the mark-up or margin given. Do not adjust at selling price.
  4. 4Adjust the count value to year end and show a clear working.
  5. 5Compare cost with NRV for each item or group. Use evidence after year end if it relates to year-end conditions.
  6. 6Take the lower figure for each item and compute the write-down.
  7. 7Post the entry: debit cost of sales, credit inventory. Update profit and the statement of financial position.
  8. 8Check what IAS 2 disclosure the question asks for and state it in the required format.

Quickest way: Timeline and cost-first shortcut

When to use it: Use this for objective test questions where the count date differs from the year-end date.

  1. Draw a line with the count date and the year-end date.
  2. Ask: were more goods in or out between the two dates?
  3. Convert any sales to cost first.
  4. If the count is after year end: add back goods sold, deduct goods bought.
  5. If the count is before year end: add goods bought, deduct goods sold at cost.
  6. Then test cost against NRV and take the lower figure.

Common mistakes in Inventory Adjustments, Year-end Counts and Disclosures

  • Adjusting the count using sales at selling price.

    The sales figure is the number in the question, so it feels natural to use it.

    Fix: Always convert to cost using the mark-up or margin before adjusting.

  • Adding goods sold and also adding purchases when the count is after year end.

    Students think both movements increase inventory.

    Fix: Work backwards: sales add back, purchases come off. Check the direction with the timeline.

  • Netting write-downs against gains on other items.

    Students compare total cost with total NRV.

    Fix: Compare cost with NRV item by item, or group by group. Never recognise a gain above cost.

  • Ignoring selling costs and completion costs in NRV.

    Students use the selling price alone.

    Fix: Deduct costs to complete and costs to sell before comparing with cost.

  • Treating all post year-end events as adjusting.

    Students remember that post year-end sales give evidence and over-apply it.

    Fix: Adjust only if the event confirms a condition at the reporting date, such as a low selling price for damaged goods. A later fire is non-adjusting.

  • Debiting the write-down to a separate expense and forgetting inventory.

    The entry is rushed.

    Fix: Debit cost of sales and credit inventory for the difference between cost and NRV.

Worked examples

Example 1

Year end is 31 December. Inventory was counted on 5 January at ₹8,40,000 at cost. Between 1 and 5 January, sales were ₹1,50,000 at a mark-up of 25% on cost, and goods costing ₹30,000 were received. Calculate inventory at 31 December.

Show the solution
  1. The count is after year end, so work backwards.
  2. Sales at cost = ₹1,50,000 × 100 ÷ 125 = ₹1,20,000.
  3. Add back goods sold: ₹8,40,000 + ₹1,20,000 = ₹9,60,000.
  4. Deduct purchases received after year end: ₹9,60,000 − ₹30,000 = ₹9,30,000.

Answer: Inventory at 31 December is ₹9,30,000.

Example 2

At the year end, inventory item X cost ₹2,00,000. After the year end it was sold for ₹1,90,000 because of damage that existed at the year end, with selling costs of ₹15,000. Item Y cost ₹1,00,000 and has NRV of ₹1,40,000. Calculate the inventory value, show the entry and name the main IAS 2 disclosures.

Show the solution
  1. The damage existed at the year end, so the post year-end sale is an adjusting event.
  2. NRV of X = ₹1,90,000 − ₹15,000 = ₹1,75,000.
  3. X is written down to the lower of ₹2,00,000 and ₹1,75,000. The write-down is ₹25,000.
  4. Y stays at cost of ₹1,00,000. The excess NRV is not recognised and cannot offset X.
  5. Inventory = ₹1,75,000 + ₹1,00,000 = ₹2,75,000.
  6. Entry: Dr Cost of sales ₹25,000; Cr Inventory ₹25,000.
  7. Disclose the policy and cost formula, the carrying amount by classification, the amount of inventory expensed, and the ₹25,000 write-down expensed.

Answer: Inventory is ₹2,75,000. Dr Cost of sales ₹25,000, Cr Inventory ₹25,000, with the IAS 2 disclosures above.

Exam tips

  • In objective questions, draw the timeline first. It stops direction errors.
  • Always check whether the question gives mark-up or margin. They give different cost figures.
  • For written parts, say why a post year-end sale is adjusting: it provides evidence of conditions at the reporting date.
  • State the entry clearly with debit and credit labels and the amount.
  • For disclosure questions, list the items briefly. Do not write generic accounting policy text.

Practice questions from Inventories and agriculture

Inventory Adjustments, Year-end Counts and Disclosures in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Inventory Adjustments, Year-end Counts and Disclosures: frequently asked questions

How do I adjust a count done after the year end?

Start with the count value at cost. Add back the cost of goods sold since year end and deduct purchases received since year end. Convert sales to cost first.

Is a post year-end sale below cost an adjusting event?

Usually yes, if it gives evidence of NRV at the reporting date, such as damage or obsolescence that existed then. IAS 10 covers this. A new event after year end, such as a fire, is non-adjusting.

What is the journal entry for an inventory write-down?

Debit cost of sales and credit inventory for the difference between cost and NRV. This reduces profit and the carrying amount of inventory.

Can a write-down be reversed?

Yes. If NRV later rises, you reverse the write-down, but only up to the original write-down so inventory does not go above cost. The reversal reduces the expense in the period. IAS 2 requires you to disclose it.