The specific identification method of inventory costing matches each unit with
Specific identification accounting is a system of inventory valuation. In this method, each item is tracked from the time it is purchased till it is finally sold. This technique is followed by the businesses that sell fewer units of an item, having high costs. It is used when the products stored as inventory have distinct features and prices. Show
What is Specific Identification Accounting 101?Specific identification accounting refers to the method of finding out the inventory costs based on the cost of purchase of the goods. It is based on the movement of specific, identifiable inventory items in and out of a company’s stock. This accounting is applicable only if each item of inventory can be specifically identified or tracked from purchase to sale. This method is often used for low-volume or high-priced items. Specific identification accounting is used to track each purchase and its respective prices individually. It provides more useful sales information when used for inventory management. Used by companies like furniture stores, vehicle dealerships, jewelry stores, art galleries, etc. Individual tracking is the main feature that distinguishes the specific identification method from LIFO and FIFO methods. In LIFO (Last in First Out) and FIFO (First in First Out) techniques, the inventory is grouped based on the time and cost in which it was purchased. Requirements of Specific Identification Accounting System
Advantages of Specific Identification AccountingUsing a specific identification accounting method for inventory management allows matching the revenue earned with the expenses incurred in respect of the company’s inventory. This means that the sales revenue is accurately matched with the cost of goods sold. Some of the main advantages of specific identification accounting are mentioned below:
Disadvantages of Specific Identification AccountingThe method is rarely used as there are only a few items purchased with unique identification codes, which are recorded in the company’s accounting records. This type of differentiation is usually not done for low-cost items. Most businesses sell products that are essentially interchangeable. Hence use FIFO, LIFO, and weighted average methods. Some of the disadvantages of specific identification accounting are listed below:
Example of Specific Identification AccountingConsider company XYZ as a trading company, dealing with different brands of a product. Let us think of the product as a variety of pens in the market. Following are the transactions that took place in the company during August 2021. Date of Purchase Units Purchased Units Sold Balance Cost Per Unit in Rupees 01/06/2021 1000 400 600 3.00 16/06/2021 500 200 300 3.10 21/06/2021 700 200 500 3.25 25/06/2021 900 300 600 3.50 Total 3100 1100 2000 As per the above table, it is clear that a total of 1100 units was sold by the company during August 2021. The sold goods consist of different costs per unit i.e., ₹3.00, ₹3.10, ₹3.25, and ₹3.50 respectively. Out of the total 1100 units of inventory the sales was as follows:
Calculation of closing stock at the end of August 2021Date of Purchase Quantity Purchased (A) Units Sold Out of the Purchased Quantity (B) Balance (C = A - B) Price in Rupees (D) Closing Stock (C * D) 01/06/2021 1000 400 600 3.00 ₹1800 16/06/2021 500 200 300 3.10 ₹930 21/06/2021 700 200 500 3.25 ₹1625 25/06/2021 900 300 600 3.50 ₹2100 Total 3100 1000 2000 ₹6455 Therefore, the value of the closing stock at the end of August 2021 is ₹6455. Calculation of the cost of goods sold for August 2021Date of Purchase Unit Sold Out of Purchased Quantity (B) Price in Rupees (D) Cost of Goods Sold (B * D) 01/06/2021 400 3.00 ₹1200 16/06/2021 200 3.10 ₹620 21/06/2021 200 3.25 ₹650 25/06/2021 300 3.50 ₹1050 Total 1000 ₹3520 Hence, the value of the cost of goods sold for August 2021 is ₹3520. Main Points to Be Noted
Key TakeawaysSpecific valuation accounting is a technique used for the valuation of inventory by assigning individual costs to each item rather than grouping them. This method helps the company to keep a track of every inventory item from the time it is purchased till the time it is finally sold. Principle requirements of a specific identification accounting are as follows:
Following are the advantages of specific valuation accounting.
The disadvantages of specific identification methods are as follows.
In short, I would like to say that specific identification accounting is one of the most important tools used for the valuation of a company’s inventory. In this method, each stock item is tracked in association with its respective costs. It can be used to calculate critical items like closing stock and the cost of goods sold. This method helps to understand at which stage the inventory item is and how much revenue is received from the sales of that particular item. Related ArticlesLead Time in Inventory Management There’s an old saying! > Time waits for none, be it for humans, business or projects.When it comes to supply or production function in inventories, ensuring timeavailability and timekeeping both are important. But how to ensure this? There’s a concept in inventory [https://www.deskera.com/blog/what-is-inventory/… Deskera BlogDeskera Content TeamShould you keep Inventory in Warehouses or Use Dropshipping? Warehouse vs. Dropshipping - which one is better. Well, we can debate over thisfor hours. However, none of us can deny that both of them have proved to be aboon for the e-commerce industry. In 2020, retail e-commerce sales worldwide amounted to 4.28 trillion US dollars,and e-retail revenues are … Deskera BlogShikha SamantInventory Valuation: LIFO Vs. FIFO Wrong purchasing decisions affecting your profits[https://www.deskera.com/blog/net-profit]? Understanding the core of inventory[https://www.deskera.com/blog/what-is-inventory] and inventory valuation can dothe trick if you are hassled by erroneous decisions pertaining to yourinventory. But how?… Deskera BlogDeskera Content TeamWhat Is a Shipping Invoice? A Simple Guide Let us ask you a simple question on international shipping finance: Suppose, you are a business owner in India and planning to export goods to abuyer in Taiwan. Then, what’s the legal document between the shipper(exporter/seller agent) and the carrier (importer/shipping/logistics)? Any guesses? … What is specific identification method for inventory costing?The specific identification method relates to inventory valuation, specifically keeping track of each specific item in inventory and assigning costs individually instead of grouping items together. It is useful and usable when a company is able to identify, mark, and track each item or unit in its inventory.
Is specific identification the same as FIFO?How does FIFO compare to the Specific ID Sell Method? FIFO (first in, first out) is the default method used when selling securities by brokerages, the IRS and GainsKeeper. FIFO sells your oldest lots first. The Specific ID method allows you to specify which shares you are selling.
Which inventory cost method identifies each individual unit sold with a specific purchase?The specific identification inventory method is an accounting method that explicitly identifies each individual unit of inventory and assigns it its actual cost. This method of inventory accounting doesn't use assumptions like first-in, first-out (FIFO), last-in, first-out (LIFO), and the average cost methods.
What is specific identification method example?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.
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