VICAccountingSyllabus dot point

How is inventory valued at the lower of cost and net realisable value, and how are inventory write-downs, losses and gains recorded?

Valuing inventory at the lower of cost and net realisable value and recording inventory write-downs, inventory losses and inventory gains, including the effect on the accounting reports

A focused VCE Accounting Unit 3 Area of Study 1 answer on inventory valuation. Explains the lower of cost and net realisable value rule, records inventory write-downs and the difference between inventory loss and gain, links each to faithful representation, and reconciles the worked figures.

Generated by Claude Opus 4.76 min answerUpdated 2026-05-29

Reviewed by: AI editorial process; not yet individually human-reviewed

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What this dot point is asking
The lower of cost and net realisable value rule
Inventory write-down
Inventory loss and gain
Why this matters

What this dot point is asking

VCAA wants you to apply the lower of cost and net realisable value rule, record an inventory write-down, and distinguish and record an inventory loss and an inventory gain, explaining the effect on the Income Statement and Balance Sheet.

The lower of cost and net realisable value rule

The rule applies the qualitative characteristic of faithful representation: an asset must not be carried at more than the amount expected to be recovered from selling it. If net realisable value is above cost, no adjustment is made, because inventory is never written up above cost.

Inventory write-down

When net realisable value is below cost, the inventory is written down to net realisable value. The reduction is recorded as Inventory Write-Down, an expense (other expense) in the Income Statement, with a credit to Inventory reducing the carrying amount on the card.

Inventory loss and gain

An inventory loss occurs when a physical stocktake counts fewer units than the inventory card shows (theft, damage, spoilage). It is recorded as Inventory Loss (expense), credit Inventory. An inventory gain occurs when the count shows more units than the card; it is recorded as a credit to Inventory Gain (a revenue or negative expense), debit Inventory. Both are recorded at cost using the relevant cost layer.

Write-down, loss and gain

Write-down scenario

A line of inventory has 100 units on the card at a cost of 30 dollars each (3,000 dollars). The selling price has fallen and net realisable value is now 26 dollars per unit. Net realisable value 2,600 is below cost 3,000, so write down by 3,000 minus 2,600 = 400 dollars. Entry: Debit Inventory Write-Down 400, Credit Inventory 400. The card now shows 100 units valued at 2,600.

Inventory loss scenario

A second line shows 50 units on the card at 40 dollars (2,000 dollars), but a stocktake finds only 47 units. Three units are missing at 40 each = 120 dollars. Entry: Debit Inventory Loss 120, Credit Inventory 120. The card is reduced to 47 units (1,880 dollars).

Inventory gain scenario

A third line shows 20 units at 15 dollars (300 dollars), but the count finds 22 units. Two extra units at 15 = 30 dollars. Entry: Debit Inventory 30, Credit Inventory Gain 30. The card rises to 22 units (330 dollars).

Report effect

The Income Statement shows an Inventory Write-Down expense of 400 and an Inventory Loss expense of 120, reducing profit by 520, partly offset by Inventory Gain revenue of 30, a net reduction of 490. The Balance Sheet reports the corrected, lower inventory carrying amounts.

Why this matters

These adjustments keep the Inventory asset faithfully represented and stop profit being overstated by carrying stock above what it can fetch. The write-down is a balance day adjustment that examiners pair with the lower of cost and net realisable value rule, and inventory loss or gain is a favourite stocktake question.

Exam-style practice questions

Practice questions written in the style of VCAA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

2021 VCAA2 marksSeven large pots remain on hand at 28 February 2021 at a cost of

160 each. The owner discounted them to

100 each (plus GST), gives away a watering can (cost

10 plus GST) with every pot sold, and free delivery of the seven pots costs Garden Leaf

105 (plus GST). Calculate the total value of the large pots at 28 February 2021 after applying the lower of cost and net realisable value rule.

Show worked answer →

Net realisable value is the estimated selling price less the costs of selling. Work it per pot, then compare with cost.

NRV per pot: selling price $100, less the watering can given away$ 10, less delivery 105 / 7 = $15 per pot. NRV = 100 - 10 - 15 = **$ 75**.

Compare: cost $160 versus NRV$ 75. The rule requires the lower, so each pot is valued at $75.

Total value = 7 x $75 = **$ 525**. (The inventory is written down from cost 7 x $160 =$ 1 120 to $525.) One mark for the correct NRV per unit, one for the$ 525 total.

2025 VCAA3 marksOn 30 September 2025, 30 football jumpers (FIFO cost

82 each) were on hand. They normally sell for

110 each (plus GST) but the owner decided to sell them at a reduced price of

75 each (plus GST), with a free coffee cup (cost

5 plus GST, sells for $10) given away with each jumper sold. This was noted in Memo 63. Prepare the General Journal entry required to record Memo 63. A narration is required.

Show worked answer →

A write-down is required when net realisable value falls below cost.

NRV per jumper: reduced selling price $75 less the coffee cup given away$ 5 = ** $70**. Cost is$ 82, which is higher than NRV $70, so write down by 82 - 70 =$ 12 per jumper.

Total write-down = 30 x $12 = **$ 360**.

General Journal entry:

Debit Inventory Write-Down (expense) $360; Credit **Inventory**$ 360. Narration: "Write-down of 30 football jumpers to net realisable value (Memo 63)."

One mark for the correct NRV (recognising the free cup as a selling cost), one for the $360 amount, and one for the correct debit and credit accounts with a narration. GST is not affected because no sale has yet occurred.