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AS 2 - Valuation of Inventories

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Sakshi Shah

AS 2
Business and Profession Income
Income Tax

AS 2 is the Accounting Standard for the valuation of inventories and their accounting treatment. This accounting standard covers methods to value the inventory of a business and its disclosure in the financial statements. The general rule mentions valuing inventories i.e. closing stock of a business at cost or market value whichever is lower. Let us understand AS 2 in detail.

Applicability of AS 2

AS 2 applies to the valuation of following types of inventory:

AS 2 for Valuation of Inventories is not applicable in the following cases:

Valuation of Inventory

Follow these steps for valuation of inventory:

  1. Calculate Cost of Inventory

    Cost of Inventory is the sum of purchase cost, conversion cost and other direct costs to bring the inventory in its present condition.

  2. Calculate Net Realisable Value (Market Value)

    Net Realisable Value is the estimated selling price of the inventory in the market i.e. the market value of the inventory.

  3. Lower of Step 1 or Step 2

    Valuation of inventory is the lower of cost or net realisable value (NRV).

For valuation of inventory, we should understand the following terms:

Methods of Inventory Valuation

Accounting Disclosure

As per AS 2, the financial statements must reflect the following details of inventory of a business:

AS 2 for Manufacturers & Traders

Any manufacturing or trading business that has inventory or stock must follow the accounting principles for the valuation of a stock.

The business should calculate the net profit by deducting other expenses from gross profit, report it as taxable income under the head PGBP and file ITR on income tax website.


What is the cost of inventory for a service provider?

The cost of inventory for a service provider includes labour cost and the cost of personnel who provide the services. It does not include the expenses not directly related to the service.

How to calculate value of inventory using weighted average cost method?

As per the weighted average cost method, you should calculate the value of closing inventory by using the average price of inward values of the inventory. The formula is as below:
Average cost per unit = Total inward value / Total inward quantity

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