Dictionary / Cost or Market, Whichever is Lower
What does Cost or Market, Whichever is Lower mean in accounting?
Quick definition
GeneralThe lesser of cost price or market value. This term guides how bookkeepers record, classify, and explain related transactions in routine financial reporting.
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Examples
Last year's fabric, priced below cost
You run a fabric shop. At the December 31 close you still have 80 yards of last year's upholstery from a textile mill that cost $22 a yard, so inventory shows $1,760. The mill's current wholesale for that leftover pattern is $12 a yard, so you write down the lot to $960, the lesser figure. In QuickBooks Online or Xero, post an inventory adjustment that reduces Inventory by $800 and hits cost of sales or an inventory write-down expense. Leave the stock at $1,760 and the balance sheet pretends you could still get $22.
Wholesale went up; leave the drivers at cost
You run a contractor supply shop. In March you bought 20 cordless drivers from a fastener supplier at $85 each, so inventory still shows $1,700. That supplier's June catalog lists the same model at $110 because of a supply squeeze; cost is still the lesser figure, so you leave the bins at $1,700 on the balance sheet. Do not write inventory up to $2,200: cost basis keeps the records at what you paid, and this rule only writes down when market is lower. If you mark the stock up, you invent profit you have not earned.
Why it matters
This rule is an inventory valuation test: carry inventory at the lesser of what you paid or current market. You check it at year-end, or whenever leftover stock has gone stale or wholesale prices have dropped; most months you leave the goods at cost. Cost basis keeps the records at what you paid; this rule is the write down when market is now lower, never a write-up when market has risen, and never cost-recovery basis, which applies sale proceeds against remaining asset cost. Skip the write-down and the balance sheet overstates stock you could not replace or sell at what you paid.
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What is Cost or Market, Whichever is Lower in bookkeeping?
The lesser of cost price or market value.
When should I use Cost or Market, Whichever is Lower?
Use Cost or Market, Whichever is Lower when the transaction facts match its definition and you need the ledger and financial statements to reflect the correct account and period.
What is a common mistake with Cost or Market, Whichever is Lower?
Cost or Market, Whichever is Lower is used for cost or market, whichever is lower entries, while C&F covers a related but distinct bookkeeping purpose. Review both terms before posting unusual transactions. A common mistake is applying it by label only instead of checking the underlying transaction details.