Valuing stock and work in progress in your accounts

2 min read

Lower ofCost or NRV

Year-end countPhysical stocktake

Moves profitAnd tax

Why stock valuation matters

Unsold stock is an asset, not yet a cost. The value you place on closing stock reduces your cost of goods sold and therefore increases profit — and tax. Overvalue stock and you inflate profit and overpay tax; undervalue it and you understate the business. It is a lever that must be pulled honestly.

The lower-of-cost-and-NRV rule

Stock is valued at the lower of cost and net realisable value (NRV) — what you could actually sell it for, less costs to sell. If stock is damaged, obsolete or worth less than you paid, you write it down to NRV. This prudence stops the accounts overstating assets you cannot recover.

Work in progress

Part-finished goods and unbilled work (work in progress, or WIP) are valued too — the materials, labour and overhead absorbed so far. Service and construction businesses can carry large WIP balances, and how they value them materially affects reported profit. Consistency of method is essential.

The stocktake

At year end you physically count stock and reconcile it to the books. Discrepancies reveal shrinkage, theft or errors. A rigorous stocktake underpins credible accounts — and lenders assessing an asset-backed facility will care about the quality of your stock records.

Funding the stock

Stock ties up cash between purchase and sale, especially for seasonal or long-lead businesses. Working-capital or stock finance funds it while it sells.

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Frequently asked questions

How is stock valued in company accounts?

At the lower of cost and net realisable value. If stock is damaged, obsolete or worth less than it cost, you write it down to what you could actually sell it for, less selling costs — a prudence rule that stops assets being overstated.

Does stock valuation affect my tax?

Yes. Closing stock reduces cost of goods sold and increases profit, so overvaluing it inflates profit and tax, while undervaluing understates the business. Value it accurately and consistently to get the right tax figure.

What is work in progress?

Part-finished goods or unbilled work, valued by the materials, labour and overhead absorbed so far. Service and construction businesses can carry large WIP balances that significantly affect reported profit.