Specific Identification - Online Tutor, Practice Problems & Exam Prep

The specific identification method allows companies to accurately value unique or easily identifiable inventory items. This method requires tracking the cost of each unit sold, such as a customized yacht, ensuring precise cost of goods sold (COGS) calculations. For example, if yacht B valued at $500,000 is sold for $800,000, the journal entries reflect cash and accounts receivable, while the remaining inventory is valued at $950,000. This method enhances gross profit understanding by directly linking revenue to specific inventory costs.

Specific Identification of Inventory

Alright. So let's talk about a special case of how we value our inventory when we have unique inventory or very easy to identify inventory. Let's check it out. This is going to be the specific identification method, it's pretty simple. So let's just dive right in. A company can properly value its goods and inventory value if it can specifically identify each unit sold, okay? This means that they know, oh, I know exactly what unit I sold because they can tell one unit from another, okay? As I said, this is usually going to require goods that are unique or otherwise just easily identified, right? It's going to be hard to tell one can of Coca Cola from another can of Coca Cola, but it might be easier to distinguish, you know, maybe one customized boat from another customized boat or something like that. Okay? So we're going to see in this example that our COGS, our cost of goods sold, well that's going to be the price we paid, the price we paid for each unit sold, right? That's pretty standard and it's just going to be oh we know how much we paid for this specific unit and that's the unit that we sold, right? So we're going to be able to identify the cost of each unit separately. And then ending inventory, well that's the price we paid for the units that we didn't sell, right, that are left over, that's going to be in ending inventory. So let's go ahead and see an example here with specific. The units on hand at the beginning of June were yacht A with a value of 350,000, yacht B value of 500,000, and yacht C value of 600,000. See, so you could see that we were able to identify each one and their own cost, right? During June, the company sold yacht B to a customer for 800,000. Half of which was paid in cash. So they're being a little tricky here with how we were paid, half of which was paid in cash. Journalize this sale and note the ending balance in the following accounts. So we want to know about inventory, revenue, and COGS, so let's see what this journal entry for the sale is going to look like, right? We sold Yacht B for 800,000 dollars right? So how did we receive that money? Well, we got half of it in cash, 800,000 divided by 2, right? That's 400,000. That's how much cash we received.

So we're going to debit cash because we know we received cash of 400,000 but we're going to get the rest of the money later, right? There's more money that's owed to us, the other 400,000, and that's in accounts receivable, right? I'm going to put AR for accounts receivable and that's 400,000 as well, right? Because eventually he's going to have to pay us for the other half of the boat, so that's an asset, accounts receivable. And then the credit side of this entry, well that's going to be revenue, right? We earned revenue of 800,000 because we sold this boat and we got that revenue, 800,000. So there we go. That's our revenue entry right there, but we also have to do our cost of goods sold entry, right? In specific identification, we know exactly what we sold, so we know which one is sold here, right? Value yacht B is what we sold and it had a value of 500,000, right? That's what we had paid for it, so we would have made another entry which I'll do over here and it would have been debiting cost of goods sold for 500,000, right, the cost of the boat to us, and we would credit inventory because it's no longer in our inventory, right? We sold that boat, so we need to get it out of inventory, right? So what is our inventory balance that's left? Well, it's going to be the other 2 boats, right? The value of yacht A and the value of yacht C. So it's going to be 350,000, and I'm going to put 350k for 1,000. 350,000 plus 600,000, and that's just 950,000 is what's left in inventory. Right? Because we sold one of those boats. Revenue, well, we earned 800k. Right? We sold 1 boat and we got 800,000 and cost of goods sold was 500,000. So you could see our gross profit there, right, would have been 800,000 in revenue minus the 500,000 in cost of goods sold. Cool. So you can see specific identification is pretty easy because we know exactly what we sold, right? So we know all those values straight up. So let's go ahead and pause here and then we'll try this practice problem, alright? Let's do it now.

Alright. Let's try this practice. Unique Robots Company currently has 4 robots in its factory: 2 units of X3ZA, which it purchased for $80,000 each, one unit of EE1C for $60,000, and one unit of C4PO for $125,000. The company then sold the EE1C model for $140,000. Right? Let's journalize this sale and note the ending balance in the following accounts. So, we see that they sold the EE1C for $140,000 and we know what the EE1C cost us as well, right? $60,000 over here. So, this is specific identification, right? We can identify exactly what we sold, so we can take that and make the cost of goods sold directly with that number, right? Let's check it out. First, let's do our revenue entry, right? We sold the EE1C model for $140,000. We'll assume we did that in cash and we received cash of $140,000. Now, it wouldn't totally be wrong if you assumed that we weren't paid in cash and we got an accounts receivable, or we could have debited accounts receivable just the same. So, cash $140,000 and then credit revenue, right? We sold this for $140,000, we earned $140,000 in revenue. So, there is our revenue entry, and then we also have to make an entry for cost of goods sold. So, we would debit cost of goods sold for $60,000, right? That is what this unit cost us, so that is going to be the expense cost of goods sold, and we're going to credit inventory, right? We need to get it out of inventory because we don't own it anymore. We sold it to a customer. So, we're going to credit our inventory to decrease that balance. So, what's left in inventory after that? Tells us we had 2 units. So, there's a little trick, 2 units of X3ZA that were purchased for $80,000 each. So, that's going to be 2 times $80,000 plus what else do we have left? We sold the EE1C and we have one unit of C4PO for $125,000. Alright. So, 2 times $80,000 is $160,000, so this will be $285,000 left in inventory. Right? Our revenue was the $140,000 that we sold it to the customer at that price and cost of goods sold of $60,000 is what we paid for the unit. Alright. So there we go. That's specific identification right there. Let's go ahead and move on to the next video.

Here’s what students ask on this topic:

What is the specific identification method in inventory valuation?

The specific identification method in inventory valuation is a technique used to track and value each unique or easily identifiable inventory item individually. This method is particularly useful for items that are distinct, such as customized products or high-value goods like yachts. By identifying the exact cost of each unit sold, companies can accurately calculate the cost of goods sold (COGS) and remaining inventory. This method ensures precise financial reporting and helps in understanding gross profit by directly linking revenue to specific inventory costs.

How does the specific identification method affect the cost of goods sold (COGS)?

The specific identification method directly impacts the cost of goods sold (COGS) by allowing companies to track the exact cost of each unit sold. When an item is sold, the specific cost associated with that item is recorded as COGS. This ensures that the COGS reflects the actual cost of the sold inventory, leading to more accurate financial statements. For example, if a yacht valued at $500,000 is sold, the COGS will be $500,000, precisely matching the cost of the sold item.

What types of businesses benefit most from using the specific identification method?

Businesses that deal with unique, high-value, or easily identifiable items benefit most from using the specific identification method. Examples include luxury car dealerships, jewelry stores, art galleries, and companies selling customized products like yachts or specialized machinery. These businesses can accurately track the cost of each individual item, ensuring precise inventory valuation and financial reporting. This method is less practical for businesses with large volumes of identical, low-cost items, such as grocery stores or retail chains.

Can you provide an example of a journal entry using the specific identification method?

Sure! Let's say a company sells a yacht (Yacht B) valued at $500,000 for $800,000. The journal entry for the sale would be:

Debit: Cash $400,000 (half of the sale price received in cash)

Debit: Accounts Receivable $400,000 (remaining amount to be received)

Credit: Revenue $800,000 (total sale price)

Additionally, the entry for the cost of goods sold (COGS) would be:

Debit: COGS $500,000 (cost of the yacht)

Credit: Inventory $500,000 (removal of the yacht from inventory)

How does the specific identification method enhance gross profit understanding?

The specific identification method enhances gross profit understanding by directly linking revenue to the specific costs of sold inventory items. By accurately tracking the cost of each unit sold, companies can determine the exact cost of goods sold (COGS) and compare it to the revenue generated from the sale. This precise matching allows for a clear calculation of gross profit. For instance, if a yacht sold for $800,000 had a cost of $500,000, the gross profit would be $300,000, providing a transparent view of profitability.