AS 2: Valuation of Inventories
Introduction: AS 2 is an accounting standard that provides guidelines for the valuation of inventories. It is applicable to all entities that prepare financial statements under the accrual basis of accounting.
Key Points:
- Objective: The main objective of AS 2 is to prescribe the method of determining the cost of inventories, its subsequent recognition as an expense, and its measurement at the lower of cost and net realizable value.
- Scope: AS 2 applies to all inventories, except for work in progress arising under construction contracts, financial instruments, and biological assets related to agricultural activity.
- Valuation Methods: AS 2 allows the use of various methods for the valuation of inventories, including specific identification, first-in, first-out (FIFO), and weighted average cost.
- Cost of Inventories: The cost of inventories consists of all costs incurred in bringing the inventories to their present location and condition. It includes the cost of purchase or production, conversion costs, and other costs necessary to bring the inventories to their present condition.
- Net Realizable Value: Inventories should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion, disposal, and transportation.
- Recognition as an Expense: The cost of inventories should be recognized as an expense in the period in which the related revenue is recognized. Any write-down of inventories to net realizable value should be recognized as an expense in the period in which the write-down occurs.
- Disclosure Requirements: AS 2 requires certain disclosures in the financial statements, including the accounting policies adopted for the valuation of inventories, the carrying amount of inventories, and any write-downs recognized as an expense.
Conclusion: AS 2 provides guidance on the valuation of inventories, ensuring that they are carried at the lower of cost and net realizable value. It helps in presenting accurate and reliable financial statements by ensuring consistent accounting treatment for inventories across different entities.

Introduction to AS 2
AS 2, also known as Accounting Standard 2, primarily deals with the valuation of inventories. It is vital for ensuring that inventory is reported accurately in financial statements, which directly impacts the financial health of a business.
Key Focus of AS 2: Valuation of Inventories
- Objective: The primary objective of AS 2 is to prescribe the accounting treatment for inventories, ensuring that they are valued at the lower of cost and net realizable value.
- Cost of Inventories: AS 2 outlines how to determine the cost of inventories, which may include:
- Purchase cost
- Conversion costs
- Other costs incurred to bring the inventories to their present location and condition
- Net Realizable Value: This concept refers to the estimated selling price of inventory in the ordinary course of business, less any costs to complete and sell the inventory.
Importance of Proper Valuation
- Financial Reporting: Accurate inventory valuation affects the cost of goods sold (COGS) and, consequently, the profit reported in financial statements.
- Decision Making: Investors and management rely on accurate inventory valuations for making informed decisions regarding resource allocation and operational efficiency.
Conclusion
In summary, AS 2 is focused on the valuation of inventories, ensuring that they are recorded at a value that accurately reflects their potential economic benefit. This standard plays a crucial role in the financial statements and overall financial health of an organization.