Inventories under Schedule III: classification, valuation note and goods in transit

Inventories take one line on the face of the balance sheet, but the note behind it has to show the right sub-heads, place goods in transit correctly and state how the stock was valued. This guide covers the inventories disclosure under Schedule III for Division I (non-Ind AS) companies. It sets out the seven sub-heads, where goods in transit go, the mode of valuation, the AS 2 rules behind the figure, a worked valuation with the note format, and the checks that link inventories to bank stock statements, ratios and CARO. It is part of our Schedule III guide. Ind AS companies follow Division II and Ind AS 2, which are not covered here.

Inventories disclosure under Schedule III: the seven sub-heads

Inventories appear as item (b) under current assets on the face of the Division I balance sheet. Paragraph 6O of the General Instructions for Preparation of Balance Sheet in Part I of Schedule III (Schedule 3 in everyday use) gives the inventory classification in three short requirements:

1. Inventories shall be classified as (a) raw materials, (b) work-in-progress, (c) finished goods, (d) stock-in-trade (in respect of goods acquired for trading), (e) stores and spares, (f) loose tools and (g) others (specify nature).
2. Goods-in-transit shall be disclosed under the relevant sub-head of inventories.
3. Mode of valuation shall be stated.

All of these are current assets, even stock that will take longer than twelve months to use. The Guidance Note says inventory consumed or realised within the normal operating cycle is current even if that takes more than twelve months after the reporting date. For the tests themselves, see current non current classification under Schedule III.

Goods in transit disclosure: under the relevant sub-head

Schedule III does not create a separate "goods in transit" class. In the Guidance Note's words, goods in transit should be included under the relevant heads "with suitable disclosure". In practice, that means one of two layouts:

• a sub-line inside the sub-head: "Raw materials ₹5,42,200 (including goods in transit ₹1,27,200)", or
• a separate line directly under the sub-head: "Raw materials: in stock ₹4,15,000; in transit ₹1,27,200".

Which goods count as in transit? Include goods whose significant risks and rewards of ownership (usually, the property in the goods) have passed to the company before the year end but which have not yet reached it. Common examples are a purchase shipped ex-works or FOB before 31 March and received in April, or an import where title has passed. When shipping terms say ownership passes on delivery, the goods are still the supplier's at the year end, and the purchase and the stock both belong to next year. Check the shipping terms of large consignments around the year end. Goods sold whose risks and rewards have already passed to the customer are not inventory, even if they are still on the road. An invoice raised before that point does not by itself take them out of stock.

Mode of valuation and AS 2: cost, cost formula and NRV

Schedule III asks only that the mode of valuation be stated; the Guidance Note expects it for each class. AS 2, notified in the Companies (Accounting Standards) Rules, 2021, sets the rules, and its paragraph 26 asks for the accounting policy, including the cost formula, and the total carrying amount with a classification appropriate to the enterprise.

The basic rule. Inventories are valued at the lower of cost and net realisable value (NRV). NRV is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs needed to make the sale.

What goes into cost.

• Cost of purchase: purchase price, duties and taxes other than those later recoverable (so GST for which input credit is taken stays out), freight inwards and other directly attributable costs, less trade discounts, rebates and duty drawbacks.
• Cost of conversion: direct labour, plus a systematic allocation of variable and fixed production overheads. Fixed overheads are allocated on normal capacity. If production is low or the plant is idle, the unallocated part is expensed, not loaded onto fewer units.
• Other costs, only to the extent they bring the inventory to its present location and condition.

What stays out of cost. AS 2 paragraph 13 lists these as examples to expense:

• abnormal amounts of wasted materials, labour or other production costs;
• storage costs, unless they are necessary in the production process before a further production stage;
• administrative overheads that do not help bring the inventories to their present location and condition;
• selling and distribution costs.

Interest is usually excluded too (paragraph 12).

Cost formula. Items that are not ordinarily interchangeable, or that are made for a specific project, take their specific cost. Everything else uses FIFO or weighted average, and the formula chosen should give the fairest approximation of cost. Standard cost or the retail method may be used for convenience if the results approximate actual cost. LIFO is not one of the permitted formulas.

NRV write-downs. These are usually done item by item. Similar items in the same product line can sometimes be grouped. Writing down a whole class, such as "all finished goods", is not appropriate. Raw materials are not written down below cost if the finished products they go into are expected to sell at or above cost. NRV is reassessed at every balance sheet date.

Outside AS 2. The standard does not apply to construction-contract WIP (AS 7), work-in-progress of service providers, or shares, debentures and other financial instruments held as stock-in-trade. For securities held as stock-in-trade, a footnote to AS 13 applies its current-investment provisions (lower of cost and fair value), so a share-trading company shows its shares as stock-in-trade and states that basis.

Worked example: valuing the stock and drafting the note

Example Pvt Ltd makes two products and also trades in one bought-in item. All figures are illustrative, for 31 March 2026.

Step 1: cost of a unit of finished goods (Product A).

Actual production was only 16,000 units. Allocating ₹14,00,000 over 16,000 units would give ₹87.50 a unit, which AS 2 does not allow. The unallocated ₹2,80,000 (₹14,00,000 − 16,000 × ₹70) is expensed. Also kept out: material scrapped in a breakdown (abnormal waste), the finished-goods warehouse rent, sales commission, office overheads and cash credit interest.

Step 2: lower of cost and NRV, item by item.

Product A's headroom does not offset Product B's ₹60,000 write-down.

Step 3: raw materials on FIFO, with goods in transit. The company holds 2,000 kg. The latest receipts were 1,500 kg at ₹210 and, before that, 800 kg at ₹200. On FIFO the closing 2,000 kg is 1,500 × ₹210 + 500 × ₹200 = ₹4,15,000. Another 600 kg at ₹212 was shipped ex-works on 28 March and arrived on 3 April. The purchase is booked in March and title had passed, so ₹1,27,200 is goods in transit under raw materials. Raw materials are not written down, because Product A, which uses them, sells above cost.

Step 4: the note.

Mode of valuation (in the note or the accounting policies): "Raw materials, packing materials, stores and spares and loose tools are valued at cost on the FIFO basis. They are not written down below cost unless the finished products in which they will be used are expected to sell below cost. Work-in-progress and finished goods are valued at the lower of cost and net realisable value. Cost includes materials, labour and a proportion of production overheads based on normal capacity. Stock-in-trade is valued at the lower of weighted average cost and net realisable value. Cost excludes GST for which input credit is available. Finished goods include a write-down to net realisable value of ₹60,000 (previous year nil)." Stating the write-down is good practice rather than a Schedule III requirement. The wording must match how the stock was actually valued.

Closing stock that is not in the Tally books

In many small companies the closing stock is not a ledger balance at all. The Tally trial balance carries the opening stock, and the closing figure appears only in Tally's Balance Sheet and P&L, either from the stock summary or from a value typed in by the accountant. Three practical consequences follow:

• It has two sides. The closing stock goes into inventories on the balance sheet and into changes in inventories (and cost of materials consumed) in profit and loss. Add it to one side only and the balance sheet is out by exactly the closing stock. See balance sheet does not tally after mapping.
• The stock summary is not a valuation. It applies the costing method set on each stock item, and Tally also offers methods AS 2 does not allow (LIFO, last purchase cost, zero cost), so check that each item uses FIFO or average cost. It does not test NRV, so slow-moving or damaged items need a separate review. Check that it excludes GST that is claimed as input credit and includes freight inwards.
• Keep the support. Count sheets, the class-wise valuation listing and NRV workings go on file, and the class totals should agree to the note.

If the client has also posted a manual "Closing Stock" ledger, make sure the figure is not counted twice.

Quarterly stock statements to banks and the inventory turnover ratio

Para Y(vii). A company with borrowings from banks or financial institutions on the security of current assets must disclose whether the quarterly returns or statements filed with them agree with the books. If they do not, it must give a summary of the reconciliation and the reasons for material discrepancies. The Guidance Note applies this if such borrowings existed at any time in the year. It includes sanctioned limits even if unused and both fund-based and non-fund-based facilities, and it looks at the quarter-end statement even where the company files monthly. The stock statement is compared with the books for each quarter, including the March statement. In practice, year-end adjustments made after the March statement was filed often show up here as differences.

Stock statements often differ from the books because they were filed before year-end adjustments, were valued at selling price or with GST, or left out goods in transit. Each is a reconciling item to explain. More on this and the other items in additional regulatory information under Schedule III.

Inventory turnover ratio. This is one of the eleven Schedule III ratios. The Guidance Note gives it as cost of goods sold or sales divided by average inventory, where average inventory is the opening plus closing balance divided by two. In the example, average inventory is (₹41,20,000 + ₹35,20,000) ÷ 2 = ₹38,20,000. With cost of goods sold of ₹2,60,00,000, the ratio is 6.81 times. State which numerator was used, use the same one for both years, and explain any change of more than 25%. See Schedule III ratios and the 25% variance.

CARO 3(ii)(a): physical verification in brief

Where CARO 2020 applies, paragraph 3(ii)(a) asks the auditor to report on three things:

• whether management verified inventory physically at reasonable intervals;
• whether the coverage and procedure were appropriate;
• whether discrepancies of 10% or more in the aggregate for each class of inventory were noticed and, if so, properly dealt with in the books.

ICAI's Guidance Note on CARO 2020 (Revised 2022) says management should normally verify all material items at least once a year. It applies the 10% test on value, net of excesses and shortages within a class, regardless of the audit materiality threshold. For classes it points to the common classifications in AS 2 paragraph 27, which largely match the Schedule III sub-heads, and it says goods in transit form part of the class they belong to. Paragraph 3(ii)(b), on quarterly returns where working capital limits of more than ₹5 crore have been sanctioned, should tell the same story as the Y(vii) note. See CARO 2020 clauses that are easy to get wrong.

Before you sign the inventories note: Schedule III sub-heads in order, with "Others" named; goods in transit inside the right sub-head; mode of valuation and cost formula stated and matching the working; NRV reviewed item by item; closing stock on both sides and agreeing to the count; stock statements reconciled; turnover ratio explained; previous year in the same layout.

Frequently asked questions

Sources

• Companies Act, 2013 — Schedule III, Division I, Part I: General Instructions para 6O (Inventories) and para 6Y(vii) and (xii) (India Code, amended text)
• Schedule III amendment — G.S.R. 207(E), 24 March 2021 (Gazette)
• ICAI — Guidance Note on Division I – Non Ind AS Schedule III to the Companies Act, 2013 (Revised January 2022), paras 7.1.6, 8.8.2, 8.9.7, 9.5.1 and the ratio explanations
• ICAI — Accounting Standard (AS) 2, Valuation of Inventories (revised 2016), as notified in the Companies (Accounting Standards) Rules, 2021
• ICAI — Guidance Note on the Companies (Auditor's Report) Order, 2020 (Revised 2022 Edition), paragraph 3(ii)

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