Net Realizable Value (NRV) is a concept used in inventory valuation and financial accounting to determine the value of an asset in accounting records. NRV estimates the amount that can be realized from an asset sale after deducting costs necessary to make the sale or complete the asset's preparation for sale. For instance, in the case of inventory, NRV is calculated by taking the sales price and subtracting any costs necessary to complete the product (e.g., finishing costs) and costs to sell (e.g., marketing expenses or commissions).
For example, a business has an inventory item initially valued at $100 expected to sell for $150. If the estimated costs to complete and sell the item total $60, the NRV would be $90, since $150 - $60 = $90. The company would adjust its records to reflect the NRV, ensuring accuracy in its financial statements. This concept ensures that assets are not overstated and adhere to conservative accounting principles.
NRV is particularly critical during the month-end close process when businesses reconcile accounts and ensure that their inventories are accurately valued. Accurate use of NRV reduces the risk of misstating financial performance. Related terms include Income Statement and Balance Sheet, as these are the financial documents where NRV computations influence reporting.