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On AS 2

Accounting Standard 2 provides guidance on valuing inventories held by businesses. It states that inventories should be valued at the lower of cost or net realizable value. Cost includes purchase price, conversion costs, and other costs to bring inventory to its present condition. Net realizable value is the estimated selling price less estimated costs to complete and sell. Common inventory valuation methods include FIFO, weighted average, and specific identification. The objective is to accurately capture inventory costs as an expense in the period in which they relate.

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601 views14 pages

On AS 2

Accounting Standard 2 provides guidance on valuing inventories held by businesses. It states that inventories should be valued at the lower of cost or net realizable value. Cost includes purchase price, conversion costs, and other costs to bring inventory to its present condition. Net realizable value is the estimated selling price less estimated costs to complete and sell. Common inventory valuation methods include FIFO, weighted average, and specific identification. The objective is to accurately capture inventory costs as an expense in the period in which they relate.

Uploaded by

khushi jaiswal
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ACCOUNTING GIVEN BY :-

STANDARD 2 Khushi Jaiswal 10


Zeba Shaikh 28
Shreya Nair 20
Muskan Ansari 2
Meaning Of Accounting Standard
◦ A ‘standard’means a generally accepted model or an ideal.
◦ Thus, accounting standard means generally accepted accounting principles.
◦ Accounting Standard are written documents containing the ‘Generally
Accepted Accounting Principles ‘ (GAPP) issued by ICAI in India .
◦ There are 32 AS in India as on date
◦ The main objective of Accounting Standard is to standardise the different
business concerns.
Introduction To AS2
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.
Objective AS2
The purpose of this Standard is to administer inventory accounting care. The
amount of expense to be carried forward before the relevant sales are recognized
is a primary concern in accounting for inventories. This Standard deals with cost
determination and its subsequent identification , including any write - down to
net realizable value, as an expense. It also offers instructions on the cost formulas
used for inventory distribution of costs.
Meaning of Inventories.
◦ Held for sale in the oridnary course of
business .
◦ In the process of production for such
sale.
◦ In the form of materials or supplies to
be consumed in the production process
or in the rendering of services .
Meaning of Net Realisable Value(NRV)

NRV is the estimated selling


price of the inventory after
deducting the estimated costs of
completion and expenses on the
sale of such inventory.
Meaning of Purchase Cost.
◦ It is the price at which
inventory is purchased. It
also includes freight
inwards, duties and taxes,
trade discounts, rebates, duty
drawbacks, and other
expenses directly related to
purchase
Meaning of Conversion Cost.

It is the cost incurred in the process of


production to convert the raw materials
into finished goods. Conversion Costs
Include both fixed costs
(depreciation, maintenance expense, etc)
and variable cost
(labour cost, raw material cost, etc)
incurred in the process of production.
Applicability of AS 2
AS 2 applies to the valuation of following types of inventory:

Raw Materials – input goods or services consumed


duringthe production process of rendering
of services.

Work In Progress – input goods or services


that are in the process of production.

Finished Goods – final goods or services


held for sale in the normal course of business.
Non Applicability of AS 2
AS 2 for Valuation of Inventories is not applicable in the following cases:

Work in progress i.e. WIP stock in the construction


business WIP stock in the service business
Shares, debentures, or other financial instruments
held as stock-in-trade Stock of livestock,
mineral oils, agricultural and forest product, etc.

In the above cases, inventory valuation is at


net realisable value.
Valuation of Inventory
Follow these steps for valuation of inventory:
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.
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.
Lower of Step 1 or Step 2
Valuation of inventory is the lower of cost or net realisable value
(NRV).
Methods of inventory valuation
First In First Out (FIFO) – As per this method, it is assumed that the
goods that come in first are sold out first. The cost of goods sold
comprises the cost of goods produced first. The closing inventory will
include the goods purchased recently.
Weighted Average Cost Method (WAC) – Under this method, the average
cost of each sale item is calculated. The closing inventory is calculated by
taking the weighted average cost of items at the beginning of the year and
purchased during the year
Specific Identification Method – If each item in the closing inventory is
easily identifiable, the
should use a specific identification method to value the inventory. Thus,
include the items sold at a specific cost in the cost of goods sold and the
cost of items left on hand in the closing stock.
Conclusion
◦ The major issue faced by business entities is to determine the cost at
which inventories must be valued as an asset in the financial statements
. Accounting standard 2 deals with the accounting treatment of
inventories by the business entities.
◦ It provides details with regards to the item that comprise inventory and
various costs associated with such an inventory. Further more, it also
prescribes various methods that an entity can use determine the cost of
its inventory.

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