Specific Identification Accounting 101
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. When individual items can be clearly identified with a serial number, stamped receipt date or RFID tag, this method is applicable.
The requirements of a specific identification tracking system are:
- Inventory items must be able to be tracked individually. The best way to do that is with labels with serial numbers or Radio Frequency Identification Tag (RFID tag) that contains a unique number identifies the product.
- The cost of each item must be able to be tracked individually. The cost per purchased item should be clearly identified in your accounting system and associated with a unique identification number.
- Inventory must be relieved for the specific cost associated with an inventory item that is sold.
These requirements can be followed with a simple accounting system, such a spreadsheet. The specific identification accounting method is best used for small business with low unit volumes.
A company that might use the specific identification method would be a business that sells fine watches or an art gallery.
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The Advantages and Disadvantages of Specific Identification Method
A major advantage of the specific identification method is the high degree of accuracy when calculating the cost of inventory. The exact cost at which something was purchased is recorded in the inventory records and charged to the costs of goods sold when the related item is sold.
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.
Another major disadvantage of the specific identification accounting methods is that it is very time-consuming to track inventory on a per unit basis, which restricts the methods to smaller quantities of inventory.