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The Specific Identification Method

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The Specific Identification Method in inventory accounting is crucial for businesses with unique, high-value items like jewelry or custom machinery. It involves assigning unique identifiers to each item, enabling precise cost tracking and accurate profitability analysis for each sale. This method ensures detailed financial outcomes but requires meticulous record-keeping and can be subject to profit manipulation.

Understanding the Specific Identification Method in Inventory Accounting

The Specific Identification Method is a detailed inventory accounting technique that assigns costs to individual items. This method is particularly useful for businesses with items that are distinguishable and high in value, such as jewelry, artwork, or custom-built machinery. By assigning unique identifiers like serial numbers to each item, the method allows for precise tracking of the cost associated with purchasing and maintaining each piece of inventory. This level of detail ensures accurate cost measurement and profitability analysis for each sale. However, the method is labor-intensive and may be subject to manipulation, as companies can choose which specific items to sell to influence reported profits.
Warehouse interior with organized shelves, color-coded boxes, worker with clipboard, forklift by loading bay, and pallets of goods on the floor.

Fundamental Principles and Implementation of the Specific Identification Method

The Specific Identification Method is grounded in the principles of individual item identification and precise cost tracking. Implementation begins with labeling each inventory item with a unique identifier, followed by recording its purchase cost and any additional expenses incurred, such as freight or handling fees. When an item is sold, its specific cost is used to calculate the cost of goods sold (COGS). Continuous monitoring and accurate record-keeping are essential to ensure the integrity of financial statements and to support audit processes. Although this method demands meticulous documentation, it provides a transparent view of inventory costs and financial outcomes.

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Specific Identification Method: Definition

Inventory accounting technique assigning costs to individual distinguishable items.

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Tracking in Specific Identification Method

Uses unique identifiers like serial numbers for precise cost tracking of each inventory item.

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Advantages and Disadvantages of Specific Identification

Ensures accurate cost measurement and profitability analysis; labor-intensive and potentially manipulable.

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