Specific Identification Method
The Specific Identification Method (or Specific ID Method) is an inventory valuation method used in accounting to track the actual physical flow of goods. Instead of averaging out costs or making assumptions about the flow of goods (as in methods like FIFO or LIFO), the Specific Identification Method tracks the actual cost of each individual item in the inventory.
This method is particularly useful for businesses that deal with unique, high-value items where each item can be distinctly identified, such as cars, jewelry, real estate, or artwork.
How the Specific Identification Method Works:
- Item Identification: Each individual item in inventory is marked, tagged, or otherwise specifically identified.
- Cost Tracking: The actual cost of each item is tracked from purchase through to sale.
- Inventory Valuation: When an item is sold, the specific cost of that item is used to determine the cost of goods sold (COGS) on the income statement.
- Remaining Inventory: The costs of the items that remain unsold are used to determine the value of the ending inventory on the balance sheet.
Example of the Specific Identification Method
Let’s delve into a detailed example using the Specific Identification Method in the context of an art gallery:
Scenario: Artistic Impressions Gallery
Setting the Scene:
Artistic Impressions is a high-end art gallery that deals with unique paintings from renowned artists. Each painting is unique, has a distinct value, and is easily identifiable.
Purchases:
In January, the gallery acquired three paintings:
- “Sunrise Serenity” by Artist A for $10,000.
- “Midnight Magic” by Artist B for $15,000.
- “Nature’s Whispers” by Artist C for $12,000.
Sales:
In March, the gallery sells two paintings:
- “Sunrise Serenity” for $14,000.
- “Nature’s Whispers” for $17,000.
Using the Specific Identification Method:
Given that each painting has a specific identified cost, when the gallery sells a painting, it matches the sale with the exact purchase cost of that painting.
- Sale of “Sunrise Serenity”:
- Selling Price: $14,000
- Cost (based on specific identification): $10,000
- Profit: $4,000
- Sale of “Nature’s Whispers”:
- Selling Price: $17,000
- Cost (based on specific identification): $12,000
- Profit: $5,000
Financial Statement Impact:
On the income statement for March:
- Revenue from Sales: $31,000 (sum of $14,000 and $17,000)
- Cost of Goods Sold (COGS): $22,000 (sum of $10,000 and $12,000, based on the specific costs of the paintings sold)
- Gross Profit: $9,000 (Revenue minus COGS)
On the balance sheet:
- Ending Inventory: $15,000 (cost of the unsold “Midnight Magic” painting)
In this scenario, the Specific Identification Method allows Artistic Impressions to track the profit from each painting accurately. This level of specificity and transparency is crucial for unique, high-value items like artworks, where costs can vary significantly between items.
