The concept of Lower of Cost and Net Realizable Value (LCNV) is a principle in accounting that pertains to the valuation of inventory. According to the principles outlined in the accounting standards, at the end of an accounting period, inventories should be valued at the lower of their cost or net realizable value.

Cost refers to the amount that a company has spent to produce or acquire the inventory, which includes expenses such as purchase or production costs, transportation costs, and other relevant charges.

Net Realizable Value, on the other hand, is an estimate of the future cash inflow from the sale of the inventory, less estimated costs to complete (if the inventory is still in the production process) and the costs necessary to make the sale, such as selling expenses and applicable taxes, excluding value-added tax (VAT).

If the cost of the inventory is higher than its net realizable value, a write-down, known as an inventory allowance or a provision for doubtful debts, is recognized. This write-down is recorded as an expense in the income statement and a corresponding reduction in the carrying amount of the inventory in the balance sheet, reflecting the reduced value.

For example, if a company has inventory with a cost of $100,000 but its net realizable value is estimated to be only $80,000 due to a decline in market prices, the company would recognize a $20,000 inventory impairment loss and adjust the inventory balance to $80,000.

This principle ensures that the financial statements reflect the current economic reality of the inventory, providing a more accurate view of the company's financial position and performance.