What is the Specific Identification Method?

This method is used to identify inventory value. It involves keeping track of every item in inventory and allocating costs separately. This is the way of calculation that is usually done using the first-in/first-out (FIFO) and the last in/first-out (LIFO).

This method allows you to track each item of inventory. This method can be used to track individual inventory items. It is useful when the individual items can be identified.

What is the Specific Identification Inventory Valuation method?

The specific identification inventory valuation system allows you to track every item in your inventory from the moment it is added until removed. This is different from LIFO and FIFO, which group pieces of inventory based on their cost.

Specific Identification Method Requirements

These are the requirements for a particular identification tracking system:

You should be able to track every inventory item individually. A durable metal or paper label with a serial number is the best option. A radio frequency identification tag may contain a unique number that uniquely identifies the product.

You should be able to track each item’s cost individually. Each item should be identified by the accounting system and assigned a unique identification number.

When an inventory item is sold, be able to reduce inventory costs.

This can be accomplished with a simple accounting program or even an electronic spreadsheet. A smaller business will find using the particular identification method easier, especially if unit volumes are small.

Understanding the Specific Identification Method

When a company can identify, mark and track every item in its inventory, the specific identification method is effective and useful. Larger companies can use the specific identification method with electronic tags or stickers that have serial numbers. However, A smaller businesses are most likely to be able to identify and count inventory items.

Sometimes there is a process which can be as simple as an employee looking at the items and writing down their details on paper. The specific identification method which can be used in the same way in an age of technology and computer programs that seem to do everything. However, inventory counts are stored in a database.

It is also required that each item purchased must be identified individually under the specific identification method. The cost of each item must be associated with a number or other identifying characteristic so that it can be linked to the item. The item must also be easy to track, find, and be available for sale when it is promised.

How to use specific identification method ?

One of the mostly known accounting methods mainly used for the valuation of the inventory.  Where this method is used to track of each and every item of the inventory which is used in the company. It is kept, from the time such inventory comes in the business for storage of inventory. Till the time it goes out of business, along with he assigning the cost to each items tracking individually rather than just grouping them together.

Example of Specific Identification Method in Accounting

Company A ltd. is mainly dealing with the trading for different type of  basket in the market. During Sep2021 , the following are the transactions took place in the company.

In Sep 2020, a total of 1,100 units was mainly sold by the company. Mainly out of the total inventory which was sold, 400 units are sold out of the purchases on 01-Sep-2020; 200 units out of  purchases made on 03-Sep-20; 200 units out of the purchases made on 5-Sep-20; the rest 300 units out of purchases made on 7-Sep-20.

How to find Specific Identification Method in Accounting from above Example ?

Practical method of finding Specific Identification Method in Accounting are :-

What is special identification in accounting?

They are accounting for species identification as a method to determine inventory costs. This method relies on the movement specific, identifiable inventory items within an out-of-stock condition. This method can be used if individual items can be identified by a serial number and stamped receipt date or RFID tag.

Which of the following businesses is most likely are use to specific identification cost flow method?

When should specific identification method be used?

Is specific identification method GAAP?

Specific identification allows for high accuracy in inventory costing. The exact cost of an item purchased can be recorded in inventory records and added to the cost to sell the item.

Under the specific identification method, gross profit is determined by each item of inventory with the relevant sales price by subtracting the actual cost of each items of inventory.

The disadvantages of the Specific Identification method

This method is seldom used because few products are identified in a company’s accounting records with a unique identification number. This method is usually restricted to high-value, unique items. Instead, most organizations sell products that can be used interchangeably, so they are more likely to use a FIFO or LIFO system. This can also be most of time-consuming and tedious to track inventory individually, limiting its use to smaller quantities.

The pros and a cons of the Specific Identification Method

However, the main drawback of the specific identification method is the need to identify and track all items in a company’s inventory and then produce them upon sale.

The item’s cost and the amount received must be attached to the specific item. This item should also have a unique identifier. This is difficult for large businesses, such as big-box retailers, due to the volume of merchandise.

This is a problem that smaller businesses are not likely to face. That is why these companies often use a particular identification method. The method has several benefits, including a greater accuracy in identifying the exact inventory numbers and a higher level of accuracy in determining the earned income or profit. It also allows for a lower error rate in calculating lost revenue, such as lost or damaged items. It is almost impossible to lose or misplace inventory with this system.

It is sometimes used to identify securities. Investors can use this method to identify securities and reduce capital gains.

This inventory method is more labour-intensive than other options. This inventory method might not be an efficient use of time for sellers of candles or t-shirts. It could be very helpful for a seller selling a variety of merchandise who needs information about what styles or products are in high demand, what isn’t selling and what needs to be restocked.

Is FIFO a specific identification method?

A specific identification inventory system mainly treats each item of a individually, by giving it in a distinct value that it tracks from a start to a finish. A method used as first-in first-out, or FIFO , system basically treats a individual items as a interchangeable, but also assigns them in a bookkeeping value on their way when inventory is out the door.

C.A. Nadeem

My Name is Nadeem Shaikh the founder of nadeemacademy.com. I am a Qualified Chartered Accountant, B. com and M.Com. having professional and specialize experience in field of Account, Finance, and Taxation. Total experience of 20 years in providing businesses solution in  Taxation, Accounting, and Finance with all statutory compliance with timely business performance Financials reports. You can contact me on nadeemacademy2@gmail.com or contact@nadeemacademy.com.