The lower of cost and net realizable value rule requires inventory to
The lower of cost and net realizable value rule requires inventory to be reported at the lower of its recorded cost or its net realizable value.
This means a business cannot leave inventory on the balance sheet above the amount it expects to recover through sale after allowing for completion and selling costs.
The rule applies accounting conservatism to inventory valuation. When selling prices weaken, completion costs rise, or goods become obsolete, the carrying amount should be reduced before the inventory is sold.
That reduction may appear through an inventory write-off or other inventory valuation adjustment, depending on the facts and the reporting framework.
This rule is closely related to Lower of Cost or Market, but the comparison base here is explicitly net realizable value rather than the broader traditional market concept.