Facts on the Specific Identification Method of Inventory Valuation

If your small business inventory consists of unique non-interchangeable items, your inventory management task is greatly simplified. While systems like the perpetual inventory method are designed to track large amounts of many different products, the specific identification method tracks one-of-a-kind inventory items. Some types of businesses that use the specific identification method are car dealerships, jewelry stores, art galleries and furniture stores.

Even though you may carry similar groups of products, the specific identification method of inventory valuation requires you to identify each one separately from the others. Some products come equipped with their own specific identification number. For example, a car dealership can use the vehicle identification number to inventory and track each car. You also can develop your own identification system to track your products. In addition, pairing a digital photo along with the item number can clearly identity each inventory item. If you manufacture specialty orders for your clients, the materials required to produce the item are assigned a unique identification number and stored separately from your other inventory.

Under the specific identification method, each item is valued at its purchase price. For example, a furniture store owner who purchased three sofas makes a separate inventory entry for each, with each also getting its own valuation. However, the total purchase price of all three sofas is listed as one item on the balance sheet. If the value of each sofa is $300, $500 and $800, the balance sheet entry would list $1,600 as the total sofa inventory value.

Inventory costing methods such as first-in first-out, or FIFO, and last-in first-out, or LIFO, are not designed for non-interchangeable merchandise. With the specific identification method, items are put into inventory when they are purchased and removed when they are sold. If your business manufactures unique products for individual clients, the direct materials, direct labor and manufacturing overhead costs are assigned to that one specific product. The full acquisition cost or manufacturing costs are charged directly to the cost of goods sold account.

An inventory sale under the specific identification method is recorded at the actual sale price. The full amount received is recorded as a debit to cash or to accounts receivable and a credit to sales. Account for the cost of item by debiting cost of goods sold and crediting inventory. The item is removed from the inventory list as soon as possible. To avoid confusion, the inventory identification number is retired. New inventory are assigned new identification numbers to avoid confusion.