What is net realizable value?
Net realizable value (NRV) is the estimated amount a business expects to receive from the sale of an asset, minus any costs associated with completing the sale or disposing of the asset. It's commonly used in accounting to value inventory or accounts receivable and helps ensure that a business’s assets are not overstated on the balance sheet.
For small business owners, understanding NRV is helpful when managing inventory, preparing financial statements, or making key decisions about pricing and profitability.
How net realizable value works
To calculate NRV, you take the expected selling price of an item and subtract any direct costs required to sell it. These costs might include shipping, sales commissions, packaging, or disposal fees.
NRV formula:
NRV = Expected selling price – Costs to complete and sell the asset
For example, if you expect to sell a product for $100, but it will cost $15 to repair and $10 to ship, your NRV would be $75.
Why net realizable value matters
NRV plays a critical role in inventory valuation and financial reporting. It helps businesses:
- Avoid overstating the value of their assets
- Comply with the lower of cost or market rule (generally accepted accounting principles, or GAAP)
- Make informed decisions about pricing and clearance
- Identify slow-moving or obsolete inventory
NRV is especially important in industries where inventory can become outdated or lose value quickly—like retail, tech, or food and beverage.
Net realizable value and inventory accounting
Under GAAP, companies must report inventory at the lower of cost or net realizable value. That means if the market price of your inventory drops, or if costs to sell rise, you may need to write down the value of your inventory to reflect the NRV.
This ensures your financial statements provide a realistic view of what your inventory is actually worth and protects your business from inflated asset values.
Here’s an example:
- Original cost of item: $120
- Estimated selling price: $100
- Selling costs: $10
- NRV = $90
Since $90 is lower than the original cost ($120), you would need to write down the value of that inventory item on your books.
NRV and accounts receivable
NRV is also used when estimating the value of accounts receivable. Not all customers pay their invoices, so businesses often calculate an allowance for doubtful accounts—a reduction in the value of receivables to reflect likely non-payment.
In this case, NRV helps you understand the actual amount you expect to collect from outstanding invoices.
Net realizable value vs. fair market value
While both terms are related to asset valuation, they’re not the same:
- NRV is focused on how much you expect to receive from selling an asset, minus any selling-related costs.
- Fair market value is the price an asset would fetch in an open market between willing buyers and sellers.
NRV is typically more conservative, since it deducts costs that may reduce the asset’s value.
When small businesses should calculate NRV
You should consider calculating NRV when:
- Preparing year-end financial statements
- Evaluating older or obsolete inventory
- Determining write-downs or allowances for uncollectible receivables
- Making pricing or liquidation decisions
Understanding NRV helps you make better financial decisions and ensures your records reflect the true value of your assets.
How Homebase helps you stay on top of small business finances
Homebase is more than just payroll—it’s your partner in running a streamlined, organized business. From tracking employee hours to processing payroll and managing documentation, Homebase makes it easy to keep your financial house in order.
With Homebase, you can:
- Automate payroll processing and tax filings
- Stay compliant with wage laws and deductions
- Manage employee hours, breaks, and time-off policies
- Keep digital records for audits or financial reporting
Explore Homebase payroll to take the stress out of team management and spend more time growing your business—with clean, accurate books and fewer manual tasks.