Advanced Accounting · AS 2 Valuation of Inventory

AS 2: Disclosure, Expense Recognition and Inventory Adjustments

Updated 4 October 2026 · Fact-checked

AS 2 requires you to disclose the inventory accounting policy, including the cost formula, and the total carrying amount classified suitably. Carrying amount is expensed when the related revenue is recognised, and write-downs and losses are expensed when they occur. If stock is counted on a later date, adjust it back to the balance sheet date using purchases and sales at cost.

Understand Disclosure, Expense Recognition and Inventory Adjustments

AS 2 does not stop at valuation. It also tells you what to show in the financial statements and when the cost of inventory becomes an expense.

Expense recognition. When inventory is sold, its carrying amount is recognised as an expense in the same period as the related revenue. This is the matching idea. Write-downs to net realisable value (NRV) and all losses of inventory are expensed in the period the write-down or loss occurs. If a write-down is later reversed because NRV has risen, the reversal is shown as a reduction in the inventory expense of the period in which it happens. The reversal can never take the carrying amount above original cost.

Disclosure. The financial statements must disclose two things: the accounting policies used to measure inventories, including the cost formula (FIFO, weighted average and so on); and the total carrying amount of inventories, classified in the way that suits the enterprise, such as raw materials, work in progress, finished goods, stores and spares, and traded goods. Companies also follow the Schedule III presentation of these classes.

Inventory adjustments. Physical counting is often done a few days after the balance sheet date, because counting on the exact date is not practical. The count value then has to be rolled back to the balance sheet date. Goods bought after the date are in the count but were not in stock on the date. Goods sold after the date were in stock on the date but are missing from the count. You fix both. Also remember that NRV is an estimate based on the most reliable evidence at the time it is made. Price movements after the balance sheet date count only if they confirm conditions that existed on the balance sheet date.

Key rules to remember

Stock at balance sheet date from a later count: Stock at B/S date = Stock on count date + Cost of goods sold (count date interval) − Purchases (count date interval); Use net figures: purchases less purchase returns, and sales less sales returns, with sales converted to cost.
Cost of sales from sales: Cost of sales = Net sales × (100 − Gross profit % on sales) ÷ 100, or Net sales × 100 ÷ (100 + Mark-up %); Check whether the profit rate is on sales or on cost. Convert to the same base before using it.
Stock at B/S date from an earlier count: Stock at B/S date = Stock on count date + Purchases (interval) − Cost of goods sold (interval); Use this when the count date is before the balance sheet date.
Lower of cost and NRV: Carrying amount = Lower of cost and NRV, item by item (or group of similar items); The write-down is an expense. A reversal is limited to the original cost.
Expense recognition rule: Carrying amount of inventory sold → expense in the period the related revenue is recognised; Write-downs and losses → expense when they occur. Reversals → reduce expense when they occur.
Disclosure rule: Disclose (a) accounting policies including cost formula; (b) total carrying amount with suitable classification; Classes like raw materials, WIP, finished goods and stores are typical classifications.

How to solve Disclosure, Expense Recognition and Inventory Adjustments questions

Use this method for any question on AS 2 disclosure, expense recognition or stock adjustment.

1Read the question and decide the type: theory on disclosure, expense treatment, or a count-date adjustment.
2For adjustment problems, note the balance sheet date, the count date, and whether the count is later or earlier.
3List every transaction in the interval between the two dates: purchases, purchase returns, sales, sales returns. Ignore transactions outside the interval.
4Convert sales to cost using the given gross profit or mark-up rate. Check that the rate is on sales or on cost.
5Apply the correct formula: for a later count, add cost of sales and deduct purchases. State clearly which direction you are adjusting.
6For NRV problems, compare cost and NRV item by item and take the lower. The excess of cost over NRV is the write-down expense.
7Show the effect on the profit and loss statement and the balance sheet, and add the required disclosures if the question asks.
8Write one line of conclusion giving the final stock figure.

Quickest way: Roll-back table for a later count

When to use it: Use this when stock was counted after the balance sheet date and the question gives purchases, sales and a profit rate for the interval.

Write four lines: Stock on count date; add cost of goods sold in the interval; less net purchases in the interval; Stock at balance sheet date.
Compute net sales first (sales less returns), then multiply by the cost percentage. For a 25% gross profit on sales, cost is 75% of sales.
MCQ trick: after a later count, stock at the balance sheet date is higher when cost of sales exceeds purchases, and lower when purchases exceed cost of sales. Use this to eliminate options before calculating.
Written format: name the rule, show the table with each line labelled, give the answer, and add one line stating that this is the stock to be shown in the balance sheet as at the year-end. Step marks come from the labelled lines.

Common mistakes in Disclosure, Expense Recognition and Inventory Adjustments

Adding purchases and deducting sales when the count is later
Students copy the wrong direction from memory without thinking about what is in the count.
Fix: Think physically. Purchases after the date are in the count but were not in stock on the date, so deduct them. Goods sold after the date were in stock on the date, so add their cost.
Deducting sales at selling price instead of cost
The sales figure is given and the profit rate is overlooked.
Fix: Always convert net sales to cost using the gross profit or mark-up rate before adjusting.
Applying the profit rate to the wrong base
Gross profit on sales and mark-up on cost are confused.
Fix: Profit on sales of 25% means cost is 75% of sales. Mark-up of 25% on cost means cost is sales ÷ 1.25, which is 80% of sales.
Ignoring returns in the interval
Returns are given as small side figures and get missed.
Fix: Use net purchases and net sales. Tick every figure in the question as you use it.
Reversing a write-down above original cost
Students take the higher NRV as the new carrying amount.
Fix: Carrying amount is the lower of cost and NRV. A reversal can raise the value only up to original cost.
Leaving out the cost formula in the disclosure answer
Students list only the total carrying amount and its classification.
Fix: Always mention both disclosures: the policies including the cost formula, and the total carrying amount with classification.

Worked examples

Example 1

A trader closes books on 31 March 2027. The stock was physically counted on 10 April 2027 and valued at cost at ₹6,00,000. Between 1 April and 10 April 2027: purchases were ₹80,000, purchase returns ₹5,000, sales ₹1,20,000 and sales returns ₹10,000. The trader earns a gross profit of 25% on sales. Find the value of stock as at 31 March 2027.

Show the solution

Stock was counted after the balance sheet date, so roll back.
Net purchases = ₹80,000 − ₹5,000 = ₹75,000.
Net sales = ₹1,20,000 − ₹10,000 = ₹1,10,000.
Cost of net sales = ₹1,10,000 × 75% = ₹82,500.
Stock at 31 March 2027 = ₹6,00,000 + ₹82,500 − ₹75,000 = ₹6,07,500.

Answer: Stock as at 31 March 2027 is ₹6,07,500.

Example 2

At the year-end a company holds three items. Item A: cost ₹1,00,000, NRV ₹85,000. Item B: cost ₹2,00,000, NRV ₹2,30,000. Item C: cost ₹1,50,000, NRV ₹1,20,000. Find the carrying amount of inventory and the write-down expensed. Next year, item C is still held and its NRV rises to ₹1,40,000. What is the treatment? State the disclosures required.

Show the solution

Compare item by item. A: lower is NRV, ₹85,000. B: lower is cost, ₹2,00,000. C: lower is NRV, ₹1,20,000.
Carrying amount = ₹85,000 + ₹2,00,000 + ₹1,20,000 = ₹4,05,000.
Total cost = ₹4,50,000. Write-down = ₹4,50,000 − ₹4,05,000 = ₹45,000 (A ₹15,000 plus C ₹30,000). Item B's higher NRV is not recognised.
The write-down of ₹45,000 is expensed in the period in which it occurs.
Next year, C's NRV is ₹1,40,000, which is below its cost of ₹1,50,000. The carrying amount rises to ₹1,40,000. The reversal of ₹20,000 is shown as a reduction in the inventory expense of that year.
Disclosures: the accounting policy for inventories, including the cost formula used, and the total carrying amount of ₹4,05,000 classified suitably, for example as finished goods or traded goods.

Answer: Carrying amount is ₹4,05,000 and the write-down expensed is ₹45,000. Next year the reversal of ₹20,000 reduces the expense. The policy including cost formula and the classified carrying amount are disclosed.

Exam tips

In a roll-back problem, write the table with labelled lines. Even if the final figure is wrong, the method earns step marks.
Underline whether the profit rate is on sales or on cost in the question before you start.
For theory questions, give both disclosure points and the expense recognition rules in separate short paragraphs.
For MCQs, do the quick direction check on whether stock should go up or down before calculating, to eliminate options.
If the question mentions NRV changes after the year-end, check whether they confirm conditions that existed at the balance sheet date before adjusting.

Practice questions from AS 2 Valuation of Inventory

Disclosure, Expense Recognition and Inventory Adjustments in other exams

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

Disclosure, Expense Recognition and Inventory Adjustments: frequently asked questions

What does AS 2 require to be disclosed?

It requires disclosure of the accounting policies adopted in measuring inventories, including the cost formula used. It also requires the total carrying amount of inventories and its classification in a way appropriate to the enterprise, such as raw materials, work in progress and finished goods.

When is inventory recognised as an expense under AS 2?

The carrying amount of sold inventory is expensed in the period in which the related revenue is recognised. Write-downs to NRV and all losses are expensed in the period they occur. Reversals of write-downs reduce the expense in the period of reversal.

How do I find stock at the balance sheet date if it was counted later?

Start with the stock value on the count date. Add the cost of goods sold between the balance sheet date and the count date, and deduct the net purchases in that interval. Use net figures after returns, and convert sales to cost.

Do events after the balance sheet date affect inventory valuation?

They can affect the NRV estimate, but only where they confirm conditions that existed at the balance sheet date, such as a price fall on stock already held. Treat such evidence as part of the estimate. Study the AS 4 rules on events after the balance sheet date alongside this.