Accounting · Inventories

Net Realisable Value and Lower of Cost or NRV

Q: What is net realisable value under AS 2?

It is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs needed to make the sale. It shows the net amount you expect to recover from the item.

Q: Why is inventory valued at lower of cost or NRV?

It follows prudence. Expected losses are recognised early, so you do not carry inventory at an amount you cannot recover. Profits on unsold goods are not recognised until sale.

Q: Do I compare cost and NRV item by item or in total?

Normally item by item. Grouping is allowed only for similar or related items, such as those in the same product line. Comparing grand totals is not appropriate.

Q: Can a write-down of inventory be reversed?

Yes. If the circumstances that caused the write-down no longer exist or NRV has risen, the write-down is reversed. The reversal is limited so that the new carrying amount is the lower of cost and the revised NRV.

Updated 1 October 2026 · Fact-checked

Net realisable value (NRV) is the estimated selling price in the ordinary course of business, less estimated costs of completion and estimated costs needed to make the sale. Under AS 2, you value inventories at the lower of cost and NRV, comparing item by item, and write down any item whose NRV is lower.

Understand Net Realisable Value and Lower of Cost or NRV

Inventory is first recorded at cost. But cost is only a starting point. If you cannot recover that cost when you sell the goods, carrying them at cost would overstate your assets and profit.

AS 2 solves this with a prudence rule: value inventories at the lower of cost and net realisable value. If NRV is below cost, you write the inventory down to NRV. The loss is recognised in the period when the fall happens, not when you finally sell.

Net realisable value is the estimated selling price in the ordinary course of business, minus the estimated costs of completion and the estimated costs necessary to make the sale. Think of it as the net cash you can expect from the item.

The comparison is normally made item by item. Where items are similar or related, such as items in the same product line, grouping may be appropriate. Comparing the total cost of all inventory with the total NRV is not appropriate, because gains on one item would hide losses on another.

If a write-down is made and later the NRV rises, the write-down is reversed, but only up to the original cost, because the new carrying amount is again the lower of cost and the revised NRV.

Key rules to remember

Net realisable value: NRV = Estimated selling price − Estimated cost of completion − Estimated selling costs; Use costs still to be incurred. Costs already incurred are part of cost, not deducted again.
Inventory valuation rule: Value of inventory = Lower of (Cost, NRV); Apply to each item, or to a group of similar or related items. Do not offset across unrelated items.
Write-down amount: Write-down = Cost − NRV (only when NRV < Cost); Charge it to Profit and Loss in the period. No write-down if NRV is equal to or above cost.
Total valuation: Closing inventory = Σ (lower of cost and NRV for each item); Add the item-wise lower figures. Never take the lower of the two grand totals.

How to solve Net Realisable Value and Lower of Cost or NRV questions

Use this sequence for any NRV question. It keeps your working clear and earns step marks.

1List each item in a table with columns: cost, estimated selling price, completion cost, selling cost.
2Work out the NRV for each item: selling price less completion cost less selling cost.
3Compare cost and NRV for each item and pick the lower. Mark which one you picked.
4Add the chosen values to get the closing inventory figure.
5Compute the write-down, which is total cost minus the valued amount, if the question asks for it or for profit.
6Show the effect on profit: the write-down reduces profit, and closing inventory at the lower value appears in the Trading Account and Balance Sheet.
7Write one line of explanation citing AS 2: inventories are valued at the lower of cost and NRV.

Quickest way: Item table with a lower-of column

When to use it: Use it for any question with several items and given selling prices and expenses. It works in under five minutes.

Draw a table with five columns: item, cost, NRV, lower value, write-down.
Calculate NRV directly in the NRV column: selling price minus all further costs, in one line.
Circle the smaller of cost and NRV in each row.
If a selling price is given as a discount or a commission percentage, convert it to rupees before subtracting.
Total the lower-value column. Cross-check: total cost minus total write-down must equal this total.

Common mistakes in Net Realisable Value and Lower of Cost or NRV

Comparing total cost with total NRV of all items
It looks faster and gives one neat comparison.
Fix: Compare item by item. A gain on one item cannot cancel a loss on another.
Not deducting selling expenses while computing NRV
Students treat the selling price as the realisable value.
Fix: Always subtract estimated costs to make the sale, such as commission and packing for sale, along with completion costs.
Writing inventory up above cost when NRV is higher
Students think the higher figure is more accurate.
Fix: If NRV is above cost, keep cost. Inventory is never valued above cost under this rule.
Deducting costs already incurred as completion cost
Confusion between past costs and future costs.
Fix: Deduct only estimated costs still to be incurred. Costs already spent are inside the cost figure.
Forgetting to show the write-down effect on profit
Students stop once they have the closing inventory value.
Fix: State that the write-down is charged to profit and loss, or is reflected by the lower closing inventory in the Trading Account.

Worked examples

Example 1

A trader has three items in stock at year end. Item A: cost ₹40,000, estimated selling price ₹55,000, selling expenses ₹5,000. Item B: cost ₹60,000, estimated selling price ₹58,000, selling expenses ₹3,000. Item C: cost ₹30,000, estimated selling price ₹36,000, selling expenses ₹2,000. Find the value of closing inventory.

Show the solution

Item A: NRV = 55,000 − 5,000 = ₹50,000. Cost is ₹40,000. Lower is ₹40,000.
Item B: NRV = 58,000 − 3,000 = ₹55,000. Cost is ₹60,000. Lower is ₹55,000, so write-down is ₹5,000.
Item C: NRV = 36,000 − 2,000 = ₹34,000. Cost is ₹30,000. Lower is ₹30,000.
Closing inventory = 40,000 + 55,000 + 30,000 = ₹1,25,000.
Check: total cost is ₹1,30,000, less write-down ₹5,000 = ₹1,25,000.

Answer: Closing inventory is valued at ₹1,25,000, with a write-down of ₹5,000 on Item B.

Example 2

A manufacturer holds 500 units of semi-finished goods costing ₹120 per unit. Each unit needs a further ₹30 to complete. The finished unit sells at ₹140, and selling costs are ₹10 per unit. Find the value of these units and the total write-down.

Show the solution

NRV per unit = 140 − 30 − 10 = ₹100.
Cost per unit is ₹120, which is higher than NRV ₹100.
Value per unit = lower of 120 and 100 = ₹100.
Write-down per unit = 120 − 100 = ₹20.
Total value = 500 × 100 = ₹50,000.
Total write-down = 500 × 20 = ₹10,000. Check: 500 × 120 = ₹60,000, less ₹10,000 = ₹50,000.

Answer: The units are valued at ₹50,000 and a write-down of ₹10,000 is charged to profit.

Exam tips

In subjective questions, always show the NRV calculation for each item, even when the answer is obvious. Step marks depend on it.
Read whether a given figure is a cost or a selling price. Questions sometimes give a replacement cost, which is not NRV.
For semi-finished goods, remember to deduct the cost of completion as well as selling cost.
Write the rule in one line before your table: inventories are valued at lower of cost and NRV as per AS 2. It earns presentation marks.
If a question gives post-balance-sheet selling prices, use them as evidence of NRV at the balance sheet date.

Practice questions from Inventories