Inventory Valuation
Stock valued at the lower of cost and what you could actually sell it for.
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As at [date].
| Item | Unit | Qty | Cost | Net realisable | Lower of | Value |
|---|---|---|---|---|---|---|
| [add one stock line per line] |
What is an Inventory Valuation?
An inventory valuation sheet puts a number on the stock you are holding at a given date: quantity counted, cost per unit, and the value carried into the accounts. That figure sets your cost of sales and therefore your profit, and it sits on the balance sheet as one of the largest current assets in most product businesses. Value it carelessly and every margin you report for the year is wrong in the same direction.
Retailers, wholesalers, manufacturers, restaurants, online sellers and workshops all produce one, usually at the financial year end and often at each month end. It is prepared after a physical count and used by the bookkeeper to post the closing stock journal, by the accountant to prepare the accounts, and by the auditor to test whether the count was real. Lenders with a stock-based facility ask for it periodically, and a buyer during due diligence will read it closely to find stock that is not worth what it says.
The rule almost everywhere is that stock is carried at the lower of cost and net realisable value, but the detail differs. IFRS and IAS 2 prohibit LIFO; US GAAP under ASC 330 permits it, and a US business using LIFO has disclosure obligations that go with it. Which costs may be included in a manufactured item's cost, and how overheads are absorbed, follows your reporting framework, and your tax authority may take a different view again. Check the rule that applies where you file before choosing a method.
The sheet values stock; it does not count it. If the count was wrong, a perfect valuation produces a confident wrong answer, which is worse than an obvious one. It also does not tell you whether stock is saleable — that judgement about obsolescence, damage and slow movement has to be made by someone who knows the goods, and then reflected as a write-down. And it is not a stock control system: it is a snapshot at one date, not a running record of movements.
What to put in an Inventory Valuation
These are the details this template asks for. Anything left blank is marked in red on the preview so you can see what is still missing.
| Field | What goes in it |
|---|---|
| Business name | For example: Barton Supply Co. |
| Your address | For example: Unit 7, Barton Road, Columbus, OH 43212 |
| Period to | Free text |
| Stock | One per line: Item | Unit | Quantity | Cost each | Net realisable value each |
How to write an Inventory Valuation
Freeze movement and count physically
Pick a cut-off date and stop goods moving during the count, or record every movement that happens while counting so it can be adjusted afterwards. Count what is physically there, including stock in transit that you already own, goods at a third-party warehouse and consignment stock you hold on someone else's behalf — that last category is counted but excluded from your valuation, and marked as such.
Record quantity, unit and location
One row per stock line: code, description, unit of measure, quantity counted, and where it was. Getting the unit wrong is the most expensive error on the sheet — 40 boxes of 12 is not 40 units. State the unit explicitly in its own column and make the count sheet use the same one, so nobody multiplies by twelve twice or not at all.
Apply a consistent cost basis
Choose FIFO, weighted average, or standard cost with variances, and apply it to every line. Cost includes the purchase price plus freight in, duty and other costs of bringing the goods to their present location and condition, less trade discounts and any recoverable tax. Note the method at the top of the sheet: switching between years without disclosure makes two sets of accounts incomparable.
Test each line for net realisable value
For every line, compare cost with what you could actually sell it for, less the costs of selling it. Where the sale value is lower, carry the line at that lower figure and show the write-down in its own column. A discontinued line costing £22 that now sells at £15 with £2 of packing and postage is carried at £13, and the £9 difference hits this year's cost of sales.
Total, reconcile and keep the evidence
Extend each line, total the sheet, and agree it to the closing stock figure in your accounts. Keep the original count sheets with the counters' names and the date, the price evidence you used, and a note of every adjustment made after the count. The valuation is only as defensible as the paperwork behind it, and that paperwork is the first thing an auditor asks to see.
Common mistakes
- Valuing stock at its selling price rather than at cost inflates both the asset and the year's profit, and it is the single most common error on a first valuation.
- Counting consignment or customer-owned goods sitting in your warehouse as your own overstates the asset and creates a liability nobody has recorded.
- Ignoring freight, duty and import costs understates unit cost, which quietly overstates gross margin on every sale of that line.
- Carrying obsolete or damaged stock at full cost because nobody wants to write it off leaves a loss sitting in the balance sheet waiting for a future year.
- Cutting off the count badly — goods received on the day but invoiced in the next period, or the reverse — puts the same item in the accounts twice or not at all.
Frequently asked questions
What does lower of cost and net realisable value mean?
You value each line at whichever is smaller: what it cost you to get it into stock, or what you could sell it for after deducting the costs of selling. Stock that has held its value is carried at cost. Stock that has gone out of fashion, passed its date or been superseded is carried at the reduced figure, and the drop is recognised as a cost now rather than when it eventually sells.
FIFO or weighted average — which should I use?
Either is acceptable under most frameworks; consistency is what matters. FIFO assumes the oldest stock sells first, suits dated or perishable goods, and tends to leave more recent costs in the balance sheet. Weighted average smooths price movements and is easier where units are identical and bought constantly. Choose one, disclose it, and do not switch without a reason your accountant is happy to explain.
Do I include labour and overheads in the cost of manufactured stock?
For goods you have made, cost normally includes direct materials, direct labour and a share of production overhead absorbed on a normal level of activity. Selling costs, general administration and storage of finished goods are usually excluded. The precise rules follow your reporting framework — IAS 2, ASC 330 or your local standard — so confirm the treatment with your accountant before setting an absorption rate.
How often should I value stock?
At least once a year for the statutory accounts, and monthly if stock is a large part of your working capital or your margin moves unexpectedly. Many businesses count high-value or fast-moving lines cyclically through the year rather than shutting down for a full count, then use the perpetual records in between. What matters is that the year-end figure rests on a real count you can evidence.
What do I do with stock I know will never sell?
Write it down to what it is genuinely worth, which may be scrap value or nil, and record the reason and the date on the sheet. Holding it at cost does not make it worth more; it just moves the loss into a later year and misleads anyone reading the balance sheet. If you later sell it above the written-down figure, that recovery is dealt with in the period of sale.
This page explains general practice and is not legal advice. Requirements differ between countries and, in some cases, between states — check what applies where the document will be used.