Which accounting concept ensures that inventory is not stated above its market value?

The accounting concept that ensures inventory is not stated above its market value is the Lower of Cost or Market principle. This principle mandates that when valuing inventory, a business must record inventory at either its historical cost or its current market value, whichever is lower. This approach helps to prevent overstatement of asset values on the balance sheet and aligns inventory valuation with the potential economic benefits that can be realized from selling that inventory.

For instance, if inventory was purchased at a high cost but current market conditions or the utility of the inventory has decreased, this principle requires that the inventory be written down to reflect its lower current market value. This conservatism in accounting helps provide a more accurate financial picture and protects stakeholders from inflated asset values.

In contrast, the Matching Principle focuses on aligning expenses with the revenues they help generate within the same accounting period, Historical Cost emphasizes recording assets based on their original purchase price without consideration of market fluctuations, and Revenue Recognition addresses the timing of revenue recorded when it is earned and realizable. These concepts serve different purposes in accounting practices and do not directly deal with inventory valuation limitations based on market value like the Lower of Cost or Market does.