Specific Identification Method Example and Explanation with Template

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By following this method, it will give you a very accurate picture of your inventory costs and profits. Better pricing, purchasing, and inventory management decisions can be made by viewing each item’s exact cost and selling price. Using this method is simple, but it requires some careful record-keeping and identification. You need to assign a unique number or tag to each item you buy and keep track of its cost in your accounting system. The Specific Identification Method is a way of tracking and assigning the cost of each individual item in your inventory. Items such as jewelry, cars, or furniture are the main products businesses opt for this method to maximize profits.

The RFID tag on each product is scanned before it is returned either to the warehouse or back to the factory floor. The Specific Identification Method only works if you are always able to separate out each individual item in your inventory. Inventory Valuation is the process of putting a value on the inventory that is being held by a business. Sign up to receive more well-researched small business articles and topics in your inbox, personalized for you. If you enjoyed this article, you might also like our article on different types of inventory or our article on Kanban inventory system.

  1. A jewelry store carries necklaces, earrings, pendants, rings and other expensive jewelry made from diamonds, emeralds, rubies, sapphires and other precious stones.
  2. When individual items can be clearly identified with a serial number, stamped receipt date or RFID tag, this method is applicable.
  3. The gallery records the COGS for this sale as its original purchase price of $10,000.
  4. Say an investor owns 1,000 shares of ABC company, a volatile small-cap manufacturer.
  5. It is also very time-consuming to track inventory on an individual unit basis, which restricts its use to smaller inventory quantities.
  6. At the end of a fiscal period (eg a quarter), the cost of an item that remains in inventory is added to the value of the ending inventory.

She sells several different types of air fresheners that all cost about the same. Here is a typical day of sales and the purchases that built her inventory. By keeping close track of which units are selling the most each day, Iliana is able to make smart orders and accurately show the cost of each scent. The first table in the graphic shows purchases made in the week leading up to our example day and the second table shows units sold on that day. https://www.wave-accounting.net/ is a method of finding out ending inventory cost. It requires a detailed physical count, so that the company knows exactly how many of each goods brought on specific dates remained at year-end inventory.

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Furthermore, the 10 apples you sold from Tuesday’s purchase would be priced at $2 each. This way, you would report a higher cost of goods sold ($25) and a lower inventory value ($5) on your balance sheet. Last in first out, or LIFO for short, is a way of valuing inventory based on the assumption that the most recent items that you bought or made are the first ones that you sell. FIFO also gives you a more accurate value of your ending inventory because it reflects the current market prices of your goods. One disadvantage of FIFO is that it can inflate your profits and taxes in an inflationary market. This approach may work if your business deals with pricey, distinctive goods with varying worth and costs—like luxury trinkets, artwork, or automobiles.

Step 3: Track the Sale of Each Item

In this article, we explain how the specific identification inventory method works and explore its advantages and disadvantages. We also provide a simple 5-step framework for implementing it, with real-world examples. For Jose’s business, one of the more common methods of inventory management, such as weighted average cost, wouldn’t be applicable.

After the sale, adjust the total inventory value by deducting the cost of the sold item. As a result, if your business operates in several countries, you may need to opt for separate methods for differing jurisdictions. However, this process becomes simpler if your business only operates in a single country.

To illustrate, assume that the company in can identify the 20 units on hand at year-end as 10 units from the August 12 purchase and 10 units from the December 21 purchase. The company computes the ending inventory as shown in; it subtracts the USD 181 ending inventory cost from the USD 690 cost of goods available for sale to obtain the USD 509 cost of goods sold. 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 accounting method is best used for small business with low unit volumes. This method of inventory evaluation can be used by small and large companies. He has a CPA license in the Philippines and a BS in Accountancy graduate at Silliman University. For every sale, you must specify the exact item of inventory that’s sold.

It also is used when the products stored have widely different features and costs. Both the cost of the item and the amount received for the sale of the item must be attached to a specific item with some form of a unique identifier that singles it out. The process is incredibly difficult for larger businesses – such as big box stores – to achieve because of the sheer volume that such companies move on a daily basis. These requirements can be followed with a simple accounting system, such a spreadsheet.

Read on to learn why you may want to use this method when other methods, such as the first in, first out method, are much easier to implement. To see our product designed specifically for your country, please visit the United States site.

Alternatively, management can choose to report lower income, to reduce the taxes they needed to pay. For example, it is hard to relate shipping and storage costs to a specific inventory item. These numbers will need to be estimated and reducing the 20 motivational quotes to inspire your next business idea‘s benefit of being extremely specific. In the context of inventory valuation, the specific identification inventory method presents several advantages and disadvantages. Specific identification accounting is a method to find out inventory costs. The method is based on the movement of specific, identifiable inventory items in an out of stock.

Implementing the specific identification method requires a systematic approach tailored to inventory valuation. It may not be ideal for businesses dealing with low-cost products or high volumes, but it could work well for businesses specializing in valuable and unique items. You should also consider your industry and location’s accounting standards and regulations.

Specific Identification Method Requirements

At tax time, using the method described above, the investor can easily match up the shares sold for $70 with the most expensive of the shares purchased (for $60 per share). A company that might use the specific identification method would be a business that sells fine watches or an art gallery. For items that are interchangeable, IAS 2 allows the FIFO or weighted average cost formulas. [IAS 2.25] The LIFO formula, which had been allowed prior to the 2003 revision of IAS 2, is no longer allowed. Check out articles about the FIFO, LIFO, and average cost methods if you think specific identification is not a good fit for your needs.

You can track heterogeneous inventory

This means that your cost of goods sold (COGS) is $200 ($100 + $100), and your remaining inventory is $100 (50 apples x $2). FIFO affects how much profit you report on your income statement and how much inventory you report on your balance sheet. The Specific Identification method is a way of tracking and valuing inventory that involves keeping track of each item individually. The method applies from the time it enters your business until it leaves.

When this information is found, the amount of goods is multiplied by their purchase cost at their purchase date, to get a number for the ending inventory cost. The FIFO method uses the earliest unit costs to determine the cost of units sold during the year, or COGS. Meanwhile, the specific identification method uses the cost of the actual units when computing COGS and ending inventory. It requires a detailed physical count, so that the company knows exactly how many of each good bought on specific dates comprise the year-end inventory.

If she had used FIFO inventory to calculate COGS and gross profit for this day of sales, she would calculate the total units sold on the day, which was 66. To get to 66 units from the purchases record, she would take the 20 vanilla and linen units and 26 of the brisket. For Iliana’s car wash business, the importance of inventory management comes from tracking sales trends.

It can help you keep track of your inventory and profits more accurately and transparently. This issue can be quite challenging for businesses that sell indistinguishable products with similar values or those that handle copious amounts of inventory. Then, you would debit your cash account by $2,000 and credit your sales account by $2,000 to record the sale. Next, you would debit your cost of goods sold by $1,200 and credit your inventory account by $1,200 to record the cost of the ring. When you decide to sell some, you could choose whichever purchase had the highest price to lower your taxes now. Of course, you will eventually have to sell some shares using the lowest price, but you can do that at a time that works best for your tax and other financial goals.