Specific Identification Method Example and Explanation with Template

The specific identification method is a way of tracking inventory costs without the need for cost flow assumptions. It’s an inventory costing method that suits businesses with high-value, low-volume goods. However, maintaining https://turbo-tax.org/2021-irs-tax-refund-schedule/ records can be tedious if your business doesn’t have an organized accounting and information system. Establishing one requires having an accounting software program and a synchronized system of manual records.

The specific identification method of assigning costs only works when inventory can be recognized and matched with an invoice or shipping document that clearly shows the cost of the purchase. When the inventory arrives, each piece is matched the invoice to allocate the cost. The specific identification method should automatically relieve the inventory of the cost of the items sold. The specific identification method should record every item in the inventory through serial numbers. Each serial number should be specific to the item, and it can be written on a metal or paper label on the product.

Accounting: Definition, Importance, Types & Cycle

The specific identification method of inventory costing attaches the actual cost to an identifiable unit of product. Firms find this method easy to apply when purchasing and selling large inventory items such as cars. Under the specific identification method, the firm must identify each unit in inventory, unless it is unique, with a serial number or identification tag. To calculate ending inventory with the specific identification method, you track the exact purchase price and other costs related to individual items.

Examples of these businesses would be vehicle dealerships, jewelry and luxury stores, furniture warehouses, and art galleries, to name a few. During the month, an agent sold SUV 0003 for $47,950, and another agent sold SUV 0001 for $52,500. Eric is a staff writer at Fit Small Business and CPA focusing on accounting content. He spends most of his time researching and studying to give the best answer to everyone.

The Pros and Cons of the Specific Identification Method

This method is rarely used, because there are few purchased products that are clearly identified in a company’s accounting records with a unique identification code. Thus, it is typically restricted to unique, high-value items for which such differentiation is needed. Most organizations instead sell products that are essentially interchangeable, and so are more likely to use a FIFO, LIFO, weighted average, or similar system. It is also very time-consuming to track inventory on an individual unit basis, which restricts its use to smaller inventory quantities. If a business decides to use specific identification method for inventory valuation, it should follow some best practices to ensure its accuracy and reliability.

It can also affect the tax obligations and cash flow of the business, as different methods may generate higher or lower taxable income and net income. Furthermore, it can affect the decision-making and performance evaluation of the business, as different methods may influence the profitability and efficiency ratios. For Jose’s business, one of the more common methods of inventory management, such as weighted average cost, wouldn’t be applicable.

Perpetual Inventory Systems

Moreover, it allows the business to match the revenue and the expense of each sale more precisely, which enhances the quality of financial reporting and analysis. Figuring the cost of goods sold is simple if you sell dozens of interchangeable items. One non-stick frying pan is much like another, for instance, so you don’t need to tie specific costs to a specific pan. When your goods for sale are distinct, like fine art, antiques or hand-tailored suits, the specific identification method for valuing inventory costs may be effective.

The perpetual system will tell Mega Irrigation the exact amount of inventory on hand at all times and what they need to restock to meet customer demand. The specific Identification method works when items in an inventory are individually identified, such as with receipt dates, barcodes, or radio frequency identification tag (RFID). A detailed system of inventory records is required to track every purchased item, the exact cost, and the closing stock. Unlike the other inventory measurement methods, the specific identification method doesn’t assume all your goods are alike. Accounting Tools recommends a system for distinguishing one inventory item from another, such as sales tags with ID numbers or an RFID tag, when using this method.

examples using the specific identification method

Note that you can also determine the cost of goods sold for the year by recording the cost of each unit sold. The USD 509 cost of goods sold is an expense on the income statement, and the USD 181 ending inventory is a current asset on the balance sheet. The specific identification costing method attaches cost to an identifiable unit of inventory.

• The average cost and LIFO methods were designed for tracking homogenous goods (think 20,000 units of the same white shirt, or 150 rolls of the same size paper).
• It is important to understand the impact of inventory valuation on your own company, and the companies that you partner with, sell to, buy from, and invest in.
• Check out articles about the FIFO, LIFO, and average cost methods if you think specific identification is not a good fit for your needs.
• IAS 2 allows the use of specific identification method, FIFO method and weighted average cost method to value ending inventory.
• If you sell heterogeneous items that can’t be counted together, specific identification is probably the best way to manage inventory.