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AS 2: Valuation of Inventories

A professional application note for accounts teams: what the standard controls, where it appears in company accounting, how to apply it and what evidence reviewers expect. Animated notes with Play, Pause, Replay, English and Hindi voice options are included below.

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AS 2: Valuation of Inventories: interactive explanation

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Professional scope: This is an implementation-oriented explanation for accountants, finance managers, controllers and reviewers responsible for company accounts.

1. What this standard controls

Inventories are measured at the lower of cost and net realisable value, with cost including purchase, conversion and other costs incurred to bring inventories to their present location and condition.

Current position: Included in the ICAI Accounting Standards framework, subject to entity applicability, notified rules and later amendments.

2. Where it appears in the real accounting world

01Raw materials, work-in-progress and finished goods at month end
02Overhead absorption and normal-capacity questions
03Slow-moving, obsolete or damaged inventory
04Goods in transit, cut-off and third-party stock

3. Practical application workflow

  1. Reconcile quantities between physical records, sub-ledger and general ledger.
  2. Build cost from eligible purchase and conversion components.
  3. Exclude abnormal waste, avoidable storage and unrelated administrative costs.
  4. Apply an appropriate cost formula consistently.
  5. Compare cost with item-level or group-level NRV and record write-downs.

4. Real-world application example

A finished product costs $1,000. Expected selling price is $1,080, but selling and completion costs are $130. NRV is $950, so the item is written down by $50. The write-down is supported by current sales orders and cost estimates.

5. Journal-entry and accounting record pattern

Write-downDr Inventory write-down expense / Cr Inventory or allowance $50
ReversalRecognise only when the reasons for the earlier write-down no longer exist, subject to the standard.

Entry wording is illustrative. Actual accounts, tax effects, dimensions and narration depend on the entity’s chart of accounts and facts.

6. Month-end and year-end control file

Controls to operate

  • Inventory ageing and movement analysis.
  • Normal-capacity review for fixed production overhead.
  • Cut-off testing around period end.
  • NRV evidence by SKU or appropriate group.
  • Reconciliation of standard cost to actual cost and variance disposition.

Common errors and red flags

  • Capitalising abnormal wastage.
  • Using selling price without deducting completion and selling costs.
  • Ignoring inactive or slow-moving SKUs.
  • Absorbing overhead based on unusually low production without adjustment.
  • Netting unrelated gains against write-downs.

7. Reviewer questions

  1. Do quantities agree to reliable source records?
  2. Which costs brought inventory to present condition?
  3. Is overhead absorption based on normal capacity?
  4. What evidence supports NRV?
  5. Are write-downs and reversals separately traceable?

Related standards: AS 1, AS 5, AS 9, AS 28

Authoritative reference:

Before approving a material conclusion, check the latest ICAI compendium, notified Companies (Accounting Standards) Rules, entity applicability and subsequent amendments.

ICAI Accounting Standards Compendium →
Companies (Accounting Standards) Rules and amendments →

Read the extended AS 2 guideBack to all standards
Professional note: This educational resource does not replace entity-specific analysis, the latest notified standard, law, regulation, audit judgment or professional advice.