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What is net realizable value?

Net realizable value is used in connection with accounts receivable and inventory.

In the case of accounts receivable, net realizable value (NRV) is the amount that is expected to turn to cash. (Some authors refer to it as the cash realizable value.) Net realizable value can also be expressed as 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 the expected selling price in the ordinary course of business minus any costs of completion, disposal, and transportation. To illustrate, let's assume that a company's cost of its inventory is $15,000. However, at the end of the accounting year the inventory can be sold for only $14,000 provided that the company spends an additional $2,000 in packaging, sales commissions, and shipping expense. Hence, the inventory's net realizable value is $12,000 ($14,000 minus $2,000).

When the net realizable value of a company's inventory is less than its cost, the company's balance sheet should report the net realizable value. In our example, the inventory will be reported at $12,000 and the income statement will report a $3,000 loss on the write down of inventory. (The inventory cost of $15,000 is being written down to the NRV of $12,000.)