Also, NewCo would be using bar codes (SKU codes) and not stickers. However, we’re going to stay low-tech here and color code our purchases. You may have come across various methods like FIFO, LIFO, or weighted difference between liability and debt average, but each has its unique approach and implications for your financial statements. Enter the specific identification method – a game-changer for those dealing with high-value or rare inventory items.

Learn with Algor Education flashcards

This method is rarely used because there are few purchased products with unique identification codes that are clearly recorded in a company’s accounting records. This differentiation is usually only needed with unique, high-value items. The financial concept of specific identification method of inventory valuation has some advantages, as given below. Check out articles about the FIFO, LIFO, and average cost methods if you think specific identification is not a good fit for your needs. Retailers order tons of inventory from wholesalers and manufacturers on a regular basis. Each computer is slightly different and can be identified by the serial number.

Useful for distinguishable and high-value items

Sign up to receive more well-researched small business articles and topics in your inbox, personalized for you.

Understanding the Specific Identification Method in Inventory Accounting

In general, businesses with high-value and slow turnover goods would benefit from this method. Examples of these businesses would be vehicle dealerships, jewelry and luxury stores, furniture warehouses, and art galleries, to name a few. Hence, you just need to add their individual costs to compute COGS. Streamlines tracking, reduces manual effort, and improves record accuracy. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting.

• As a sale occurs COGS or cost of goods sold is charged with the actual or invoice cost leaving the actual cost of inventory on hand still in the inventory account.
• Now imagine applying these principles across various industries with unique high-value assets; it’s easy to see why this method is crucial for detailed recordkeeping and accounting accuracy.
• This way, they ensure that the cost of goods sold reflects the true cost of that specific camera, not just an average.
• Retailers who sell luxury goods usually a specific serial number or batch number or any other unique identifier and so they benefit from this method of inventory tracking.
• The specific identification inventory method is one of the available methods used in inventory management.
• When VIN 3716 is sold, the actual cost of that specific 2021 Ford Explorer is removed from inventory and placed in COGS.

On the 15th, NewCo bought 10 bats at $10 each and put a green sticker on them to specifically identify the cost of the bat without revealing it to the customers. In reality, it’s unlikely that NewCo would account for baseball bats using the specific indentification method. It might track carbon fiber mountain bikes that way, when there are only a few in stock and most of them are different and high-priced items.

Related Articles

If so, the specific identification method might be your best bet. Large inventories with items like equipment are a perfect fit for the specific identification method. Each piece of equipment usually has its unique features and costs. Companies can use this method to keep accurate records of their high-value assets.

A huge palette of homogenous goods is most like indistinguishable. The invoice must be detailed and the purchases must be identifiable by model number, serial number, bar code, or RFID chip. It must be detailed enough to match it with individual items ordered. Accountants find this technique helpful because it matches actual costs to revenues generated from sales—key for precision in financial reports. Now imagine applying these principles across various industries with unique high-value assets; it’s easy to see why this method is crucial for detailed recordkeeping and accounting accuracy.

This enables you to hold the older purchased stock for 12 months at a lower cost-basis for a long-term capital gain taxed at a lower rate (up to 20% for 2021 and 2022). FIFO assumes a cost flow based on the order of inventory acquisition, while the specific inventory method assigns actual costs to each item individually. For every sale, you must specify the exact item of inventory that’s sold.

Adjusting the cost of goods sold (COGS) and ending inventory is a key part of the Specific Identification Method. This approach relies on tracking each item’s actual cost in the inventory. Congrats on reading the definition of specific identification method.

Use RFID tags or QR codes to efficiently manage inventory of identical items. The report the database generates would look something like this, except it would have every item in the store listed, and the total of the Inventory List (subsidiary ledger) would equal the GL control account. This detailed tracking helps managers make informed decisions about asset use and replacement. Calculate the value of the closing stock of the company at the end of August 2019 and the goods sold during August 2019.

For additional insights, check out our article on what COGS is and how to calculate it. The specific identification method is used to track individual items of inventory. This method is applicable when individual items can be clearly identified, such as with a serial number, stamped receipt date, bar code, or RFID tag.