Accounting valuation definition

What is an Accounting Valuation?

An accounting valuation is the inclusion of assets and liabilities in the accounting records of an organization in accordance with the valuation rules of the applicable accounting framework. There are a number of required valuation methods, including historical cost for fixed assets and market value for marketable securities. There is a general trend towards allowing or requiring more assets and liabilities to be valued at their market values.

A proper accounting valuation is needed for each line item presented in the financial statements, so that analysts can properly evaluate the financial results and financial condition of a business.

Example of Accounting Valuation

Elf Electronics has purchased 100 smartphones at $300 each, costing a total of $30,000. Later, the cost to acquire the same smartphone model drops to $250 per unit, due to a decrease in market price. Elf now needs to determine the value of this inventory on its balance sheet. It has recorded the inventory at its original purchase cost. So, under this method, the inventory would remain valued at $30,000 on the balance sheet, regardless of the current market value.

However, the company is also subject to the lower of cost or market rule, under which it must report the inventory at the lower of its original cost or its current market replacement cost. In this case, the inventory’s market cost has fallen to $25,000 (100 units × $250). Elf should write down the inventory to $25,000 to reflect the lower value. By choosing the lower of cost or market method, the company aligns the inventory’s balance sheet value with current market conditions, which presents a more accurate financial position to the users of its financial statements.