New RBI Grade B 2025 Notification will come Soon! Enroll Here

    Question

    As per which accounting concept an asset should be

    valued at ‘Lower of net realizable value’ or ‘Fair value’ ?
    A Entity concept Correct Answer Incorrect Answer
    B Prudence concept Correct Answer Incorrect Answer
    C Accrual concept Correct Answer Incorrect Answer
    D Consistency concept Correct Answer Incorrect Answer
    E Going concern concept Correct Answer Incorrect Answer

    Solution

    The accounting concept that states that an asset should be valued at "Lower of net realizable value" or "Fair value" is the Conservatism concept, also known as the Prudence concept. This concept requires that a cautious approach should be taken in the face of uncertainty, and that losses and expenses should be recognized when they are probable, while gains and revenues should be recognized only when they are certain. In the case of an asset, if the asset's carrying value on the balance sheet exceeds its net realizable value or fair value, the asset must be written down to the lower value.  For example, if a company has inventory that has a carrying value of $10,000, but its net realizable value is only $8,000, the company must write down the inventory to $8,000, as per the Conservatism concept. This ensures that the company recognizes the potential loss in value of the inventory, even if it has not yet been sold.

    Practice Next

    Relevant for Exams: