Stock valuation: cost or net realisable value
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Updated 29 Sep 2026
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AI summary
How to value closing stock and why it directly changes profit.
4 sections
The rule (AS 2 / Ind AS 2)
Value stock at cost or net realisable value (NRV), whichever is lower, item by item.
- Cost = purchase price + freight inward + other costs to bring it to its present location and condition, minus recoverable taxes (GST input credit is not part of cost).
- NRV = expected selling price − costs to complete and sell.
Cost formulas
| Method | Idea | Allowed? |
|---|---|---|
| FIFO | First in, first out: closing stock is the latest purchases | Yes |
| Weighted average | Average cost of all units available | Yes |
| LIFO | Last in, first out | No (not allowed under AS 2) |
Why it matters
Closing stock is credited to the Trading account. Overvaluing it by ₹1 lakh overstates profit by ₹1 lakh.
In Hisab Central
Inventory Items shows closing quantity, average rate and value. Check slow-moving or damaged items and write them down to NRV at year end.
Physical stock should be counted at least once a year and differences adjusted through a stock journal.
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