In accounting, what method records inventory at the lower of its original cost or net realizable value?

In accounting, the method that records inventory at the lower of its original cost or net realizable value is called lower of cost and net realizable value.

Net realizable value is the estimated selling price in the ordinary course of business minus the estimated costs of completion and sale. If that amount falls below recorded cost, the inventory is written down so its carrying amount does not overstate the expected economic benefit.

The rule reflects prudence: inventory should not be reported at more than the amount the business expects to realise from selling it. Write-downs can result from damage, obsolescence, falling selling prices, or rising completion costs. The assessment is made using the applicable accounting framework and relevant inventory categories.

This term should not be confused with fair value. Fair value is a market-based measurement concept, while net realizable value is specific to the entity’s expected sale proceeds and related costs. International Financial Reporting Standards use lower of cost and net realisable value for inventories, with British spelling in the standard’s wording.