AS-2: (REVISED) VALUATION OF INVENTORIES
AS 2 is mandatory in nature for all entities. According to AS-2 'inventories' are assets
(a) held for sale in the ordinary course of business
(b) In the process of production for such sale(WIP); or
(c) raw material consumed in the production process including loose tools and spare parts.
Exclusion from AS-2
a. Under construction building b. Stock of securities( shares, debentures, bonds) c. Natural
resources d. Live stock e. Service provider f. Machinery spares which can be used only in
connection with an item of fixed asset and whose use is expected to be irregular. Such
machinery spares are accounted in accordance with accounting standard AS-10 Accounting for
PROPERTY, PLANT AND EQUIPMENT.
VALUATION OF INVENTORIES OF FINISHED GOODS/WIP
According to AS-2 inventories should be valued at the lower of cost and net realizable value.
Inventory system:-There are two inventory systems, viz. Periodic Inventory System and
Perpetual Inventory System.
(i) Periodic Inventory System:
Periodic Inventory System is a method of ascertaining inventory by taking an actual physical
count (or measure or weight) of all the inventory items on hand at a particular date on which
information about inventory is required. Under this system, all purchases and purchase returns
of inventories arc recorded. But issues of materials are not recorded on regular basis. Therefore
the inventories used during the year is calculated by adding opening stock to purchases and
deducting closing stock of inventories.
Cost of goods Sold = Opening Inventory + Purchases – Closing Inventory
(i) Perpetual Inventory System: Perpetual Inventory System is a method of recording inventory
balances after each receipt and issue. Under this system all purchases of material, issue Jo
production, return to suppliers, and balance of materials are recorded in store ledger. Under
this system store ledger shows complete movement of materials.In order to ensure accuracy of
perpetual inventory records, physical stocks should be checked and compared with recorded
balances. The discrepancies, if any, should be investigated and adjusted in the accounts
properly.
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