Inventory Valuation under AS 2: Cost, Net Realisable Value and Common Mistakes

Scope: Entities applying AS 2; ordinary trading/manufacturing inventory example for FY 2025-26. Ind AS entities assess Ind AS 2 separately. Verification date: 11 October 2026.

Closing stock needs more than a spreadsheet total

A stock report can look precise while using outdated quantities, incomplete purchase costs or an unrealistic selling price. Inventory valuation requires both a quantity review and a value review. The final number affects cost of sales, profit, assets and financial ratios.

AS 2 requires inventory measurement at the lower of cost and net realisable value. Cost includes relevant purchase/conversion costs and other costs bringing inventory to its present location and condition. Net realisable value considers estimated selling price less relevant completion and selling costs.

First establish what stock belongs to the entity

Obtain the physical-count records and reconcile them to the inventory ledger. Identify goods held for others, goods sent on approval, material with job workers and goods in transit. Check contractual ownership and the applicable cut-off rather than including everything physically present in the warehouse.

Investigate negative quantities and unusually large stock adjustments before valuation. A correct rate cannot repair an incorrect quantity. Record who checked the exceptions and retain the supporting documents.

A worked trading-stock example

Assume a fictional business holds 100 units. Purchase price is ₹1,000 per unit and inward freight is ₹50 per unit. Recoverable GST is excluded from this simplified cost. Cost is therefore ₹1,050 per unit, or ₹1,05,000 in total.

At year-end, estimated selling price is ₹1,020 per unit and selling costs are ₹40 per unit. NRV is ₹980 per unit, or ₹98,000. The inventory value is ₹98,000 and the write-down is ₹7,000, subject to the complete facts and assessment.

Review manufacturing costs carefully

For work in progress and finished goods, obtain a bill of materials and a conversion-cost working. Review overhead allocation and normal capacity. Idle-capacity costs and abnormal waste need separate consideration rather than automatic inclusion in inventory.

Use a consistent permitted cost formula for relevant inventory. Do not change the method merely to reach a desired closing profit. Keep the calculation traceable to purchasing and production information.

Slow movement is a review signal

An item not sold for twelve months is not automatically worthless. It may remain usable or saleable. Conversely, recently purchased goods may already be damaged or subject to a price fall. Examine actual condition, subsequent sales and expected costs instead of applying an unsupported blanket percentage.

Create an exception list showing item, quantity, cost, estimated realisation, evidence and proposed write-down. Identify the management estimate separately from the preparer's calculation, and obtain review of significant judgement.

Final reconciliation and presentation

1. Agree quantities with the reviewed stock records.
2. Check ownership and year-end cut-off.
3. Reperform cost and NRV calculations.
4. Document material write-downs.
5. Agree the final inventory value with the books, P&L working and inventory note.

When using assureOffice or another Schedule 3 financial builder, confirm how closing stock enters the preparation workflow. Avoid including the same stock amount both through the trial balance and through an additional adjustment. Reliable source workings make automated presentation useful; they remain essential to the valuation itself.

Retain a line-level valuation trail

Keep quantity, cost method, unit cost, NRV evidence and write-down together for each reviewed item or appropriate grouping. If the selling price comes from a later invoice, explain why it supports the year-end estimate. Account for relevant completion and selling costs when assessing NRV instead of comparing cost with gross selling price alone.

Review unusual negative quantities and zero-cost items before calculating the final value. They can reflect timing errors, missing receipts or incorrect master data. An inventory valuation formula will calculate a number even when the underlying quantity is wrong; reconcile those exceptions with stock and purchase records first.

Related articles

• Year-end Accounting Adjustments: Accruals, Prepayments and Cut-off Checks
• Trial Balance Tallies, but Financial Statements Do Not: How to Find the Difference
• Schedule III Ratios: Calculations, Supporting Workings and Common Errors

Sources and references

• ICAI AS 2 — Valuation of Inventories