What is the Specific Identification Method?
Specific identification method is one of the accounting methods used for the valuation of the inventory where the track of each and every item of the inventory used in the company is kept, from the time such inventory comes in the business till the time it goes out of business, along with assigning the cost to each such items individually rather than grouping them together.
The companies which deal with high-value items such as jewelry, handicrafts etc mainly use the Specific identification method as it keeps a record of each of such items having the high value.
Example of Specific Identification Method in Accounting
Company Y ltd. is dealing with the trading of the different pens in the market. During the month of August 2019, the following transactions took place in the company.
During the month of August 2019, a total of 1,100 units was sold by the company. Out of the total inventory sold, 400 units are sold out of purchases on 01-Aug-2019, 200 units are sold out of the purchases made on 08-Aug-19, 200 units are sold out of the purchases made on 22-Aug-19 and the rest 300 units are sold out of the purchases made on 31-Aug-19.
Calculate the value of the closing stock of the company at the end of August 2019 and the goods sold during the month of August 2019.
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Solution
Calculation of the closing stock at the end of August 2019.
Thus the value of the closing stock at the end of August 2019 is $ 2,420.
Calculation of the cost of goods sold for the month of August 2019.
Thus the value of the cost of goods sold for the month of August 2019 is $ 1,315.
Advantages of the Specific Identification Method in Accounting
The different advantages related to the Specific Identification Method are as follows:
- The first and most important advantage of using the Specific identification method is that it helps the business in keeping the track of each and every item of the inventory used in the company from the time such inventory comes in the business till the time it goes out of business.
- With the use of the specific identification, method cost is assigned the cost to each and every item used in the company individually unlike the LIFO and FIFO methods where the cost is assigned to the inventory by grouping them together on the basis of some specified criteria. This ensures the high degree accuracy in the valuation of the closing stock at the end of the particular period and in the valuation of the cost of the goods sold during the period.
Disadvantages of Specific Identification Method
The disadvantages related to the Specific Identification Method are as follows:
- As according to the Specific identification method, track of each and every item of the inventory used in the company from the time such inventory comes in the business till the time it goes out of business is kept, so it requires lots of efforts and time of the person who is responsible for such tracking.
- In a case where the Specific identification method is used by the companies then under those situations, the net income of the company can be manipulated easily by the management of the company.
- As in the company having a huge number of transactions, it is difficult to clearly identify the purchased products, so the Specific identification method is rarely used and is restricted to the businesses dealing in high-value items.
Important Points
The different important points related to the Specific Identification Method are as follows:
- Under the Specific Identification Method, each and every item sold during the period and each and every item that remains as part of the inventory of the company is identified and assigned the cost separately. After that the cost of the specific items which are sold by the company during a period of time is included in cost of the goods sold during that particular period and cost of the items that remains as the part of the inventory of the company at the end is included as the closing stock of the company for that period.
- The companies which deal with high-value items such as jewelry, handicrafts etc mainly use the Specific identification method as it keeps a record of each of such items having a high value.
Conclusion
Specific Identification Method is one of the important inventory valuation concepts in accounting wherein each inventory item and its associated cost is tracked to identify the key items like Cost of goods sold, beginning inventory and ending inventory. This is not the case in the companies where the FIFO (First in first out), LIFO (Last in first out) or any other method for the valuation of inventory is used as those methods group the different items together on the basis of certain specified criteria.
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