Netteygingarverðmæti

Netteygingarverðmæti, often translated as "net realizable value" in English, is an accounting term used to describe the estimated selling price of an inventory item in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. This concept is crucial for valuing inventory on a company's balance sheet.

The primary purpose of using net realizable value is to ensure that inventory is not overvalued. If the expected selling price of an item falls below its cost, or if the costs to sell it are high, it may be necessary to write down the inventory to its net realizable value. This reflects a more conservative and accurate portrayal of the asset's worth.

The calculation involves taking the selling price and subtracting direct costs associated with completing the product, such as labor and materials if the item is not yet finished. It also accounts for selling expenses, including commissions, advertising, and shipping costs. The resulting figure is the net amount a company can realistically expect to receive from selling the inventory.

Adopting net realizable value as an inventory valuation method helps in making informed business decisions. It highlights potential losses early on, allowing management to take corrective actions. This principle is often applied when inventory is obsolete, damaged, or when market prices have declined significantly.