Net realizable value is used in connection with accounts receivable and inventory.
In the case of accounts receivable, net realizable value means the debit balance in the asset account Accounts Receivable minus the credit balance in the contra asset account Allowance for Uncollectible Accounts. For example, if Accounts Receivable has a debit balance of $100,000 and the Allowance for Doubtful Accounts has a proper credit balance of $8,000, the resulting net realizable value of the accounts receivable is $92,000.
In the context of inventory, net realizable value is used in the calculation of the lower of cost or market. In this situation, net realizable value or NRV means the expected selling price in the ordinary course of business minus any costs to complete and dispose. Net realizable value amount becomes the ceiling for the replacement cost. NRV minus the normal profit becomes the floor. See Lower of Cost or Market for an in-depth explanation and many examples.
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