lower of cost or market
Lower of Cost or Market is the accounting rule that says you record your unsold stock at whichever is lower, what you paid for it or what it would fetch today.
In plain English
Every trader in Balogun market knows this feeling without ever calling it accounting. You bought a container of shoes at ₦8,000 a pair, but fashion moved on, or a cheaper Chinese version flooded the market, and now nobody will pay more than ₦5,000 for your pair. You do not keep telling yourself the shoes are worth ₦8,000 just because that is what left your pocket. You accept the ₦5,000 truth and adjust, because pretending otherwise only fools you, not the market.
Lower of Cost or Market takes that everyday market wisdom and turns it into a rule for company accounts. When a business values its inventory at the end of a reporting period, it is not allowed to simply write down what it paid. It must compare the original cost against the current market value and record the lower figure. The idea is simple honesty. A business should never overstate what its stock is worth, because that would flatter the balance sheet with a value nobody would actually pay.
Think of a Lagos electronics importer holding a warehouse of phones bought at ₦150,000 each. If newer models arrive and the market price for that same phone drops to ₦110,000, the accountant records ₦110,000 as the inventory value, not the original ₦150,000. It stings to admit, but it keeps the books truthful.
In the United Kingdom, a fashion retailer stuck with last season's coats does the same thing. If the coats cost £40 each to buy but can only be sold now at £25 in a clearance sale, £25 is what appears on the books. Nobody gets to hide behind old receipts.
The rule protects investors, lenders and even the business owner from a nasty surprise later. Better to take the smaller, honest number now than to find a pile of overvalued stock when it is time to sell or borrow against it.
A Kano textile wholesaler buys fabric rolls at ₦12,000 each. By the end of the reporting period, cheaper imported fabric has pushed the market price down to ₦9,000 per roll. Under Lower of Cost or Market, the wholesaler records each roll at ₦9,000, not ₦12,000, even though that is not the happy number.
Questions people ask
Why more than keep the original cost, since that is what was actually paid?
Because accounting is meant to show what things are worth now, more than what happened in the past. Keeping an inflated cost figure would mislead anyone reading the books, including the owner.
Does this rule apply to all types of business assets?
It mainly applies to inventory and stock, the goods a business holds to sell. Other assets like buildings or equipment follow different valuation rules, often involving depreciation instead.
What happens if the market price later goes back up?
Under most accounting standards, you do not simply reverse the write down and restore the higher value. The lower figure generally stays until the stock is actually sold or a new valuation period applies.
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