What is 'net realizable value'?

Net realizable value is defined as the estimated selling price of an asset, minus the costs that are directly associated with its sale. This concept is particularly important in accounting because it helps determine the value at which an asset can actually be expected to be liquidated. This value is crucial for assessing inventory, accounts receivable, and other assets to ensure that they are not overstated in financial statements.

For inventory, for example, net realizable value ensures that assets are recorded at the amount that is expected to be recovered through their sale, minus any costs necessary to complete the sale. This aligns financial reporting with the economic reality of asset values, contributing to more accurate financial statements.

Understanding net realizable value assists in decision-making regarding whether to maintain, sell, or write down an asset, ensuring that businesses reflect a true and fair view of their financial position.