In the Balance Sheet, how is Net Realisable Value recorded?

Net Realisable Value (NRV) is an important concept in accounting, particularly in assessing the value of inventory on the balance sheet. It represents the estimated selling price of an item, minus any costs that are necessary to make the sale (like selling expenses, disposal costs, etc.). In terms of reporting inventory values, NRV must be compared against the cost price of the inventory.

When determining how inventory is recorded in the balance sheet, an important principle is to report it at the lower of cost or Net Realisable Value. This means that if the market value of the inventory drops below its original cost price or if NRV is lower than the cost, the inventory should be recorded at its NRV. This approach aims to adhere to the conservatism principle in accounting, which serves to prevent overstatement of assets and income.

Given this understanding, the accurate choice reflects the methodology of taking the lowest value between the cost price and the net realisable value, as it ensures that the inventory is not overstated in the financial statements. This principle safeguards against eventual losses from inventory that may not sell at a profit. It allows businesses to present a more realistic picture of their asset value on the balance sheet.