Accounting explained
Inventory Valuation: Meaning, Format and Example
At the end of the year, a shop has to put a value on the stock on its shelves. That figure becomes an asset in the balance sheet and decides the cost of goods sold, so it directly changes the profit.
The basic rule
Under Accounting Standard 2 issued by the ICAI, inventories are valued at the lower of cost and net realisable value (NRV). Cost includes the purchase price, non-recoverable taxes and the costs of bringing goods to the shop, less trade discounts. NRV is the expected selling price less the costs needed to sell. Goods that are damaged, expired or out of fashion may be worth less than they cost, and must be written down.
Cost formulas: FIFO and weighted average
When the same item is bought at different prices, you need a rule for which price the closing stock carries. AS 2 allows first-in, first-out (FIFO) or weighted average cost. Last-in, first-out (LIFO) is not permitted.
Worked example: sunflower oil at Sri Lakshmi Stores
| Pouches | Rate | Value | |
|---|---|---|---|
| Opening stock | 100 | ₹130 | ₹13,000 |
| Purchase 1 | 200 | ₹140 | ₹28,000 |
| Purchase 2 | 100 | ₹150 | ₹15,000 |
| Available | 400 | ₹56,000 | |
| Sold during the period | 300 | ||
| Closing stock | 100 |
The two answers
| Method | Closing stock | Cost of goods sold |
|---|---|---|
| FIFO: the oldest pouches are sold first, so the last 100 bought remain | 100 × ₹150 = ₹15,000 | ₹13,000 + ₹28,000 = ₹41,000 |
| Weighted average: ₹56,000 ÷ 400 = ₹140 a pouch | 100 × ₹140 = ₹14,000 | 300 × ₹140 = ₹42,000 |
In both cases closing stock + COGS = ₹56,000. When prices are rising, FIFO gives a higher closing stock and a higher profit.
Net realisable value in practice
Suppose 10 of the remaining pouches were damaged and can only be sold at ₹100 each. Their cost under FIFO is ₹150 each, but NRV is ₹100, so they are valued at ₹100: a write-down of ₹500. Closing stock under FIFO becomes ₹14,500. Expired medicines, last season's clothes and phones replaced by a new model are the usual cases.
Common mistakes
- Valuing stock at MRP or selling price
- Including GST that you can claim as input credit in the cost
- Using a different method each year, which makes profits incomparable
- Ignoring damaged and expired stock
- Not counting stock and simply carrying the system figure
Why consistency matters
The method matters less than using the same one every year. If Sri Lakshmi Stores valued its oil at weighted average this year and switched to FIFO next year, part of next year's profit would come from the change of method, not from trading. AS 2 requires the same cost formula for inventories of a similar nature and use. Disclose a change, with its effect, if one is ever made.
Key terms on this page
- Cost: purchase price plus non-recoverable taxes and costs of bringing goods to the shop
- Net realisable value: expected selling price less the costs to sell
- FIFO: first-in, first-out; the oldest units are treated as sold first
- Weighted average: total cost of units available ÷ number of units
- Write-down: reducing stock to NRV when it is below cost
About the worked example
The examples on our accounting pages follow one shop through one year: Sri Lakshmi Stores, a kirana in Mysuru owned by Ramesh, for the financial year 2025-26. It sold ₹48 lakh of goods (before GST), made a gross profit of ₹10.4 lakh and a net profit of ₹4.7 lakh, and ended the year with a balance sheet total of ₹7.95 lakh. The figures are illustrative but they add up across every page, so you can follow one transaction from the journal to the balance sheet.
How TripleBill handles it
TripleBill values stock as quantity × each item's current purchase price, and says so on its stock value report; it does not calculate FIFO or weighted average cost today. Pharmacy mode tracks batches with expiry and sells nearest-expiry first. For audited year-end figures, your accountant applies AS 2 to the counted stock.
General information on bookkeeping, not accounting or tax advice. For your final accounts and filings, consult a chartered accountant.
Last reviewed
Last reviewed: November 2026.
- Reference: ICAI Accounting Standard (AS) 2, Valuation of Inventories (revised), and Ind AS 2 for companies following Ind AS
Frequently asked questions
How is closing stock valued?
At the lower of cost and net realisable value, using FIFO or weighted average to work out cost.
Is LIFO allowed in India?
Not under AS 2 or Ind AS 2.
What is net realisable value?
The estimated selling price less the estimated costs to complete and sell.
Should I value stock at selling price?
No. Stock is valued at cost, or NRV if lower; valuing at selling price counts profit before the sale.
Can I change my valuation method?
Only for a good reason, applied consistently, and with the effect disclosed. Ask your accountant first.
Does closing stock affect GST?
Stock valuation is an accounting matter, but stock records matter for GST when you cancel registration, switch schemes or claim credit on stock in hand.
Is stock valued with or without GST?
Without GST you can claim as input credit. If you are not registered, or the credit is blocked, the GST is part of cost.
How does TripleBill value stock?
At quantity × each item's current purchase price. It does not calculate FIFO or weighted average today, so your accountant applies AS 2 for the final accounts.
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