Valuing your closing stock: cost, NRV and consistency

Value closing stock at cost or net realisable value, whichever is lower, item by item, with the same method every year. A worked example in rupees.

Last reviewed: November 2026

Closing stock is normally valued at the lower of cost or net realisable value (NRV), worked out item by item, using the same costing method every year. Cost is what you paid to get the goods into your shop or godown; NRV is what you can realistically sell them for, minus the costs still needed to sell them. Pick the lower figure for each item, add them up, and apply the method consistently. Your CA will confirm the exact method your business should follow.

Why does closing stock valuation matter?

Closing stock sits right inside your profit. A higher closing stock figure means a lower cost of goods sold and a higher profit; a lower figure does the opposite. Overvalue it and you show profit that is not real. Undervalue it and you hide profit that will surface next year, because this year's closing stock becomes next year's opening stock.

It also matters outside your own books. Banks look at stock when assessing working capital limits, and partners or buyers of a business look at it to judge what the business is worth. A figure built on guesswork weakens all of these conversations.

What counts as "cost"?

Cost is everything it took to bring the stock to its present location and condition. For a trader, that usually means:

The purchase price, after trade discounts
Inward freight, cartage and loading charges
Other direct costs of getting the goods into your godown

Tax you can claim back as input credit is generally not part of the cost; tax you cannot claim back may be. That is a question for your CA, as the answer depends on your registration and the goods.

For a manufacturer, cost also includes conversion: direct labour and a fair share of production overheads. Selling costs, general office expenses and storage after the goods are ready are generally not part of cost.

When identical items are bought at different prices across the year, you need a costing method to decide which purchase price applies to the stock left over. The common ones are first-in-first-out and weighted average. We cover how they differ in FIFO, LIFO and FEFO explained. Which method is acceptable for your books is something to settle with your CA.

What is net realisable value?

NRV is the estimated selling price in the ordinary course of business, minus the estimated costs to complete the item (if it is unfinished) and to sell it, such as packing, freight-out or commission.

NRV drops below cost more often than shop owners expect:

Goods are damaged, soiled or past expiry
A product line is outdated, such as last season's apparel or an old phone model
Market prices have fallen since you bought
Stock has moved so slowly that you will need a clearance discount to sell it

NRV is an estimate, but it must be grounded in evidence: recent sale prices, price lists, clearance offers you have actually made, or sales after the year end.

How do you apply "lower of cost or NRV"?

Compare item by item, or by groups of closely similar items. Do not compare your whole stock in one total. If you do, the profit hidden in good items will cover the loss on bad ones, and the write-down you need will disappear.

Worked example (illustrative figures only)

A small electrical goods shop counts its stock at year end. The figures below are made up to show the method.

Item	Qty	Cost per unit (₹)	Expected selling price (₹)	Selling costs per unit (₹)	NRV per unit (₹)	Value used per unit (₹)	Closing value (₹)
LED bulbs	400	60	95	5	90	60 (cost)	24,000
Ceiling fans	20	1,800	2,400	100	2,300	1,800 (cost)	36,000
Old-model fans	10	1,600	1,300	100	1,200	1,200 (NRV)	12,000
Dented extension boards	30	250	150	10	140	140 (NRV)	4,200
Total							76,200

At cost, the same stock would be ₹83,500 (₹24,000 + ₹36,000 + ₹16,000 + ₹7,500). The ₹7,300 difference is the write-down: the loss already built into the old-model fans and the damaged boards is recognised this year, when it actually happened.

Now look at what happens if you compare in total instead. Total NRV would be ₹36,000 + ₹46,000 + ₹12,000 + ₹4,200 = ₹98,200, which is above total cost of ₹83,500, so you would keep everything at cost and miss the ₹7,300 loss entirely. That is why the comparison is done item by item.

Why does consistency from year to year matter?

Because your profit is a comparison between two stock figures. Opening stock and closing stock both feed into cost of goods sold. If you value one on weighted average and the other on FIFO, or include freight one year and leave it out the next, the change in method moves your profit, not the change in your business.

Consistency means:

The same costing method (FIFO, weighted average or whichever your CA has agreed) every year
The same rules on what goes into cost, such as freight and loading
The same approach to NRV: how you grade damaged, slow-moving and expired stock

A change is possible when there is a genuine reason, for example moving to a method that gives a truer picture after your business changes. It should be a considered decision, documented, and its effect explained. Make it with your CA before the year closes, not as a way to adjust the profit after the numbers are in.

Common mistakes to avoid

Valuing at selling price or MRP. This books profit on unsold stock.
Comparing cost and NRV in total. Good items hide the losses on bad ones.
Ignoring dead stock. Items that have not moved in many months often have an NRV well below cost.
Leaving out inward freight in some years. Small items, but a quiet break in consistency.
Rounded guesses at year end. "Roughly ₹5 lakh of stock" is not a valuation. Count, then value.
Switching methods without telling anyone. Your CA, and anyone reading your accounts, needs to know.

When does this need extra care?

Some businesses need specialist judgement on top of the basic principle: manufacturers valuing work-in-progress, businesses with goods held on consignment or at a job worker's premises, and trades with heavy price swings such as metals or agricultural produce. The principle is the same, but how cost and NRV are measured needs your CA's input.

How do you make year-end valuation less painful?

The hard part is rarely the rule. It is having reliable quantities, purchase costs and batch or expiry details for every item on the last day of the year. In a spreadsheet, costs get overwritten, freight goes unrecorded and nobody can tell which batch is which. Inventory software that keeps every purchase rate and batch makes the cost side close to automatic, leaving you to judge NRV. We compare the two approaches in Excel vs inventory software.

FAQ

What does "lower of cost or net realisable value" mean? For each item, compare what the stock cost you with what you can realistically sell it for, after deducting the costs still needed to sell it. Carry the lower of the two figures in your closing stock. This stops your books from showing stock at a value you will never recover.

Can I value closing stock at selling price? Generally no. Valuing at selling price records profit on goods you have not sold yet, which inflates your results and makes this year's figure impossible to compare with last year's. Selling price matters only when it has fallen below cost. Confirm the exact treatment for your business with your CA.

Can I change my valuation method from one year to the next? Not casually. Valuation is meant to be consistent, so your profit can be compared across years. A change is normally made only for a sound reason, and it needs to be explained and its effect shown. Speak to your CA before changing anything, not after the books are closed.

Should damaged or slow-moving stock be valued at cost? Not if it can no longer be sold at cost. Damaged, expired, outdated or slow-moving goods should be checked against what they will realistically fetch, less selling costs. If that is below cost, write them down to that lower figure. Count and grade such stock separately at year end.