net realisable value
Net Realisable Value is what you would actually pocket from selling something, after subtracting the costs of getting it sold.
In plain English
The woman who sells fabric at Balogun market has bales of Ankara sitting in her shop, and every December she does the same calm arithmetic in her head before the owanbe season rush.
She does more than look at what she paid for the fabric and call that its worth on her books. She asks herself a harder, more honest question. If I sold this bale today, what would land in my hand after I pay the tailor for alterations, the agbero for loading, the transporter, and whatever discount I give to move it fast.
That final number, the one left standing after all those costs are stripped away, is Net Realisable Value. It is not the price tag, not the cost price, not wishful thinking. It is the true cash a business could expect to squeeze out of an asset, usually inventory, once every expense of selling it has been paid.
Businesses use this to avoid lying to themselves on paper. If a shop in Lagos bought phones for ₦150,000 each but a new model has flooded the market and buyers now only want them at ₦90,000, and it will cost ₦5,000 per phone in repairs and marketing to move them, the honest value in the books is ₦85,000, not ₦150,000. Accountants insist that inventory is recorded at the lower of cost or net realisable value, precisely so a company does not parade unsold, ageing stock as if it were still worth its original price.
A UK furniture retailer sitting on unsold sofas after a slow winter faces the same reckoning. The sofas cost £400 each to make, but if the only way to clear them is a clearance sale at £250 with £30 spent on delivery and marketing, their true realisable value is £220, and the books must reflect that, not the original £400.
A Kano trader has rice stock that cost ₦40,000 per bag. Due to a price crash, she can now only sell each bag for ₦32,000, and it costs her ₦2,000 per bag in transport and bagging to complete the sale. Net Realisable Value equals ₦32,000 minus ₦2,000, which is ₦30,000 per bag, and that is the figure her accounts should show, not the ₦40,000 she originally paid.
Questions people ask
Why can businesses more than use the original cost price for their stock?
Because prices change, goods age, fashions shift, and technology moves fast. If a business kept valuing old stock at what it originally cost, its accounts would overstate how much it is really worth, which misleads owners, investors and anyone lending it money.
Does Net Realisable Value only apply to physical goods like inventory?
It is most commonly used for inventory, but the same thinking applies to other assets a business plans to sell, such as receivables it expects to collect less than the full amount on, or equipment being sold off at the end of its life.
What happens if the Net Realisable Value is higher than the original cost?
Accounting rules are cautious here. Even if NRV is higher than cost, the asset is usually still recorded at cost, because accountants prefer not to record profits before a sale has actually happened.
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