Accounting · Inventories

Meaning and Scope of AS 2 Inventories

Updated 1 October 2026 · Fact-checked

AS 2 (Valuation of Inventories) is the Indian accounting standard that tells you how to measure and present inventories. Inventories are assets held for sale in the ordinary course of business, in production for such sale, or as materials or supplies to be used in production or services. Some items are excluded from its scope.

Understand Meaning and Scope of AS 2 Inventories

Every business holds stock of some kind. A shop holds goods to resell. A factory holds raw materials, half-made goods and finished goods. AS 2 is the rulebook for how such stock is measured in the books and shown in the financial statements.

The standard defines inventories as assets that fall in one of three groups:

Held for sale in the ordinary course of business (finished goods, traded goods).
In the process of production for such sale (work-in-progress).
In the form of materials or supplies to be consumed in production or in rendering services (raw materials, stores and spares, loose tools).

The test is purpose of holding, not the name of the item. A computer bought by a trader for use in the office is a fixed asset. The same computer held by a computer dealer for resale is inventory. Always ask: why is this item held?

AS 2 does not apply to everything that looks like stock. It excludes: (a) work-in-progress arising under construction contracts, including directly related service contracts (covered by AS 7); (b) work-in-progress that arises in the ordinary course of business of service providers; (c) shares, debentures and other financial instruments held as stock-in-trade; and (d) producers' inventories of livestock, agricultural and forest products, and mineral oils, ores and gases, to the extent they are measured at net realisable value under well-established practices in those industries.

The standard also uses key terms. Net realisable value (NRV) is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. The core rule of AS 2, which you study in later topics, is that inventories are valued at the lower of cost and net realisable value.

Key rules to remember

Definition of inventories: Inventories = assets held (i) for sale in ordinary course, (ii) in production for such sale, or (iii) as materials/supplies to be consumed in production or services; Classify by purpose of holding, not by the name of the item.
Items outside AS 2: Excluded: construction contract WIP | service providers' WIP | financial instruments held as stock-in-trade | producers' livestock, agricultural and forest products, minerals (when measured at NRV by established practice); Learn these four as a list. Questions often ask you to pick the excluded item.
Net realisable value: NRV = Estimated selling price − Estimated costs of completion − Estimated costs necessary to make the sale; Selling price is the estimate in the ordinary course of business.
Basic measurement rule: Inventories are valued at the lower of cost and NRV; Introduced here. Cost components and formulas are covered in later topics.

How to solve Meaning and Scope of AS 2 Inventories questions

Use this method for any question that asks whether an item is inventory or whether AS 2 applies.

1Read the facts and find why the entity holds the item: resale, production, consumption, or long-term use.
2If the item is held for long-term use in operations, it is not inventory. Treat it as a fixed asset and stop.
3If it fits one of the three inventory groups, mark it as inventory under AS 2 and name the group (finished goods, WIP, raw materials or stores).
4Check the exclusion list: construction contract WIP, service providers' WIP, financial instruments, and producers' livestock, agricultural and forest products and minerals measured at NRV.
5If an exclusion applies, state that AS 2 does not apply and name the standard or practice that governs, such as AS 7 for construction contracts.
6Write your conclusion in one line with the reason, then add the NRV definition or the lower of cost and NRV rule if the question asks for valuation.

Quickest way: Purpose test plus exclusion checklist

When to use it: Use this for short-answer or true/false style questions where you have only a few minutes.

Ask one question: is it held to sell, to make something for sale, or to consume in making or serving?
Scan the four exclusions in your head: contracts, services, financial instruments, producers' natural products.
Write the answer as: item, purpose, group or exclusion, conclusion.
Keep the sentence short. One clear reason earns the mark.

Common mistakes in Meaning and Scope of AS 2 Inventories

Treating all assets of a trader as inventory.
Students go by the nature of the item, such as a machine or a vehicle.
Fix: Apply the purpose test. Items held for use over several periods are fixed assets, even if the dealer sells the same item as stock.
Applying AS 2 to shares held by a share dealer.
The shares are stock-in-trade, so they sound like inventory.
Fix: Financial instruments held as stock-in-trade are excluded from AS 2. Remember the exclusion by its wording.
Including work-in-progress of a construction contractor under AS 2.
WIP is listed as inventory, so students assume all WIP is covered.
Fix: Only WIP in production for sale is inside AS 2. Construction contract WIP is covered by AS 7, and service providers' WIP is excluded.
Leaving out stores and spares and loose tools from inventories.
Students think inventory means only goods for sale.
Fix: Include materials and supplies consumed in production or services as the third group.
Defining NRV as simply the selling price.
The deductions in the definition are overlooked.
Fix: Write NRV = estimated selling price less estimated costs of completion and costs necessary to make the sale.

Worked examples

Example 1

M/s Rao Traders deal in office furniture. At year end they hold 20 chairs bought for resale and 5 chairs bought for use in their own office. Identify which chairs are inventories under AS 2 and give reasons.

Show the solution

Find the purpose of holding. The 20 chairs are held for sale in the ordinary course of business.
The 5 chairs are held for the firm's own use over several years, not for sale or for consumption in production.
The first group fits the definition of inventories. The second group does not.

Answer: The 20 chairs are inventories (finished or traded goods) under AS 2 because they are held for sale. The 5 chairs are fixed assets, not inventories, because they are held for use in the business.

Example 2

State with reasons whether AS 2 applies to: (a) steel and cement held by a company in its own manufacturing unit; (b) work-in-progress of a builder on a construction contract; (c) shares held by a broker as stock-in-trade.

Show the solution

For (a), steel and cement are materials to be consumed in production, which is the third inventory group. AS 2 applies.
For (b), WIP arising under a construction contract is an excluded item. It is covered by AS 7, so AS 2 does not apply.
For (c), shares held as stock-in-trade are financial instruments, which AS 2 excludes.

Answer: (a) AS 2 applies, as these are raw materials held for production. (b) AS 2 does not apply, because construction contract WIP is covered by AS 7. (c) AS 2 does not apply, because financial instruments held as stock-in-trade are excluded.

Exam tips

Learn the three inventory groups and the four exclusions word for word. Short questions come straight from these lists.
Always give a reason with your conclusion. A bare yes or no earns few marks in a subjective paper.
Name the group when you classify an item: finished goods, WIP, raw materials, or stores and spares.
When a question mentions a contract, a service business or shares, check the exclusion list first.
Write the NRV definition in full with both deductions. It often appears as a 2 to 3 mark theory question.

Practice questions from Inventories

Meaning and Scope of AS 2 Inventories: frequently asked questions

What is inventory as per AS 2?

Inventories are assets held for sale in the ordinary course of business, in production for such sale, or as materials and supplies to be consumed in production or in rendering services. This covers finished goods, work-in-progress, raw materials and stores. The purpose of holding decides the classification.

Which items are excluded from the scope of AS 2?

AS 2 excludes construction contract WIP, service providers' WIP, financial instruments held as stock-in-trade, and producers' inventories of livestock, agricultural and forest products, and minerals measured at NRV under established industry practice. Learn this as a four-item list.

Does AS 2 apply to spare parts and loose tools?

Yes, when they are materials or supplies consumed in production or services, they are inventories. Major spares that meet the definition of a fixed asset are treated differently. Check how long and for what purpose the item is used.

What is net realisable value in AS 2?

NRV is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. AS 2 values inventories at the lower of cost and NRV.