Cost Accounting · Material Costs

Inventory Valuation and Record Keeping in Cost Accounting

Updated 10 October 2026 · Fact-checked

Inventory record keeping tracks every material receipt, issue and balance in quantity (bin card) and in quantity plus value (stores ledger). Stock is verified physically and differences are adjusted. Closing inventory is valued at the lower of cost and net realisable value (NRV). Solve questions by finding cost, finding NRV, then taking the lower figure item by item.

Understand Inventory Valuation and Record Keeping

Materials are often the largest cost in a business, so you must know what is in stores, where it is, and what it is worth. Record keeping gives you the first two answers. Valuation gives you the third.

There are two main records. The bin card is kept by the storekeeper with the goods. It records only quantities: receipts, issues and balance. The stores ledger is kept by the costing department. It records quantities and values, so it shows the rate and amount of every receipt, issue and balance. The bin card is updated at the time of each movement. The stores ledger is updated from documents such as the goods received note and the material requisition.

Documents drive the records. A material requisition note is raised by the user department to ask for materials. The storekeeper issues against it, and the issue is posted to the bin card and the stores ledger. A material return note sends unused materials back to stores. A material transfer note moves materials between departments or jobs. A bill of materials lists the standard materials for a job or product.

Book balances can differ from the actual stock because of theft, evaporation, wrong issues or posting errors. So stock is verified. Perpetual inventory is the system of continuously recording receipts, issues and balances, so the bin card and stores ledger show the balance after every movement. Continuous stock taking is the method of verifying those records: a few items are counted regularly through the year, so that all items are covered over the period. The physical count is compared with the bin card and stores ledger. Differences are investigated, reported, and adjusted by approved entries. Under periodic stock taking, all items are counted at one time, usually at year end.

For valuation, inventory is shown at the lower of cost and 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 needed to make the sale. The idea is prudence: do not carry stock at more than you can recover. Compare item by item or group by group of similar items, not the grand total, unless items are closely related.

Key rules to remember

Closing stock valuation rule: Value = Lower of (Cost, NRV); Apply to each item or each group of similar items. Do not net gains on one item against losses on another.
Net realisable value: NRV = Estimated selling price − Estimated costs of completion − Estimated selling costs; For raw materials not being sold, replacement cost is often used as the best available measure of NRV, provided the finished goods are expected to sell at or above cost.
Stores ledger balance: Closing balance = Opening balance + Receipts − Issues; Check this in both quantity and value. The quantity must agree with the bin card.
Stock discrepancy: Shortage or excess = Physical quantity − Book (bin card) quantity; A negative result is a shortage. A positive result is an excess. Value it at the stores ledger rate.
Physical stock adjusted to the required date: After-date count: Required-date stock = Count stock + Issues − Receipts after the required date Before-date count: Required-date stock = Count stock + Receipts − Issues between the count date and the required date; Use the first formula when the count is taken after the required date, such as a count after the balance sheet date. Take only the issues and receipts that fall after the required date. Use the second formula when the count is taken before the required date. Take only the receipts and issues between the count date and the required date. Work in quantity first, then value.

How to solve Inventory Valuation and Record Keeping questions

Use this order for any question on records, verification or valuation.

1Read the requirement and note whether it asks for records, stock differences, or closing stock valuation.
2List the items with quantity, cost per unit and selling price per unit. Note any costs of completion and selling.
3For records, build the ledger in date order with receipts, issues and balance in quantity and value. Use the pricing method given.
4For verification, compare physical count with book balance for each item. Compute shortage or excess in units and in rupees at the cost rate.
5For valuation, compute NRV per unit for each item, then compare it with cost per unit.
6Pick the lower figure for each item and multiply by the quantity. Add the items to get total stock value.
7State the adjustment if asked: write-down to NRV, shortage written off, or excess credited, and give one line of interpretation.

Quickest way: Item-wise table for cost versus NRV

When to use it: Use this for any numerical question with several items and both cost and selling data.

Draw columns: Item, Quantity, Cost per unit, NRV per unit, Lower per unit, Value.
Compute NRV per unit first by deducting completion and selling costs from selling price.
Circle the lower rate in each row and multiply by the quantity.
Add the Value column. The write-down equals total cost minus total value.
For stock count differences, compute units gap first, then rupee value at the stores ledger rate.

Common mistakes in Inventory Valuation and Record Keeping

Writing that the bin card shows values.
Students mix up the bin card with the stores ledger.
Fix: Remember: bin card is quantity only and kept in stores. The stores ledger has quantity and value and is kept in the costing department.
Comparing total cost with total NRV of all items together.
It looks quicker and gives one comparison.
Fix: Compare item by item, or group by group of similar items. A gain on one item cannot offset a loss on another.
Forgetting to deduct selling costs and completion costs from selling price to get NRV.
Students treat selling price as NRV.
Fix: Always write the NRV formula first and deduct both costs before comparing with cost.
Valuing a stock shortage at selling price.
Students think of what the lost goods could have sold for.
Fix: Value shortages and excesses at the stores ledger cost rate, since they are inventory records.
Not adjusting a count taken on a different date from the balance sheet date.
The question gives the count figure and students use it directly.
Fix: Roll the count back or forward using receipts and issues between the two dates, in quantity first and then value.

Worked examples

Example 1

A company has three items in closing stock. Item A: 200 units, cost ₹50 per unit, selling price ₹70, selling cost ₹5 per unit. Item B: 100 units, cost ₹80 per unit, selling price ₹85, selling cost ₹10 per unit. Item C: 150 units, cost ₹40 per unit, selling price ₹60, selling cost ₹4 per unit. Find the value of closing stock at the lower of cost and NRV, and the write-down.

Show the solution

NRV per unit of A = 70 − 5 = ₹65. Cost is ₹50. Lower is ₹50. Value = 200 × 50 = ₹10,000.
NRV per unit of B = 85 − 10 = ₹75. Cost is ₹80. Lower is ₹75. Value = 100 × 75 = ₹7,500.
NRV per unit of C = 60 − 4 = ₹56. Cost is ₹40. Lower is ₹40. Value = 150 × 40 = ₹6,000.
Total value = 10,000 + 7,500 + 6,000 = ₹23,500.
Total cost = 10,000 + 8,000 + 6,000 = ₹24,000.
Write-down = 24,000 − 23,500 = ₹500, arising only on item B (100 × ₹5).

Answer: Closing stock is valued at ₹23,500. A write-down of ₹500 is made on item B.

Example 2

The bin card of material X shows a balance of 1,200 units on 31 March. A physical count on that date finds 1,150 units. The stores ledger shows the stock at ₹36 per unit. The company allows a normal loss of 2% of book quantity for this material. Compute the discrepancy, its value, and state the treatment.

Show the solution

Shortage in units = 1,200 − 1,150 = 50 units.
Value at stores ledger rate = 50 × 36 = ₹1,800.
Normal loss allowed = 2% of 1,200 = 24 units. Value = 24 × 36 = ₹864.
Abnormal shortage = 50 − 24 = 26 units. Value = 26 × 36 = ₹936. Check: 864 + 936 = ₹1,800.
Treat the normal shortage of 24 units (₹864) as part of the cost of the material, so it is absorbed by the remaining good units, or as a production overhead, depending on its nature.
Charge the abnormal shortage of 26 units (₹936) to the Costing Profit and Loss Account, after investigating the cause.
Correct the bin card and stores ledger to 1,150 units, after approval by a responsible officer.

Answer: There is a shortage of 50 units valued at ₹1,800. Of this, 24 units (₹864) are normal shortage, treated as part of the cost of material or as a production overhead. The remaining 26 units (₹936) are abnormal shortage and are charged to the Costing Profit and Loss Account. Records are corrected to 1,150 units.

Exam tips

For a theory question on bin card versus stores ledger, answer in a table-like list: who keeps it, what it records, when it is updated and what it is used for.
In valuation problems, show the NRV working per item. Marks are given for each step even if one figure is wrong.
In stock verification questions, name the treatment of normal and abnormal differences. Examiners expect both.
In MCQs on valuation, check if the stock is raw material, work in progress or finished goods. Identify the correct NRV before comparing.
Do not mix up perpetual inventory and continuous stock taking. Perpetual inventory is the system of records updated for every receipt and issue. Continuous stock taking is the verification of a few items regularly through the year. Contrast both with periodic stock taking, where all items are counted at one time.

Practice questions from Material Costs

Inventory Valuation and Record Keeping in other exams

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

Inventory Valuation and Record Keeping: frequently asked questions

What is the difference between a bin card and a stores ledger?

The bin card is kept by the storekeeper and records quantities only. The stores ledger is kept by the costing department and records both quantities and values. The bin card is updated at each movement. The stores ledger is posted from documents.

Is inventory valued at cost or NRV?

Inventory is valued at the lower of cost and net realisable value. You compare the two for each item or group of similar items. The lower figure is used for closing stock.

How is physical stock verification done?

Stock is counted either through continuous stock taking, where a few items are counted regularly through the year, or through periodic stock taking, where all items are counted at one time. This is different from perpetual inventory, which is the system of recording every receipt and issue. The count is compared with the bin card and stores ledger. Differences are investigated and adjusted through approved entries.

Which documents are used for issuing materials?

The user department raises a material requisition note. The storekeeper issues against it and posts the bin card. The costing department posts the stores ledger from the same note. Unused materials come back through a material return note.