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 this method as it keeps a record of each of such items having 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 August 2019, the following transactions took place in the company.
| Date | Transaction | Price |
|---|---|---|
| 1-Aug-19 | Purchased 1000 Units | 1.10 |
| 8-Aug-19 | Purchased 500 Units | 1.20 |
| 22-Aug-19 | Purchased 700 Units | 1.30 |
| 31-Aug-19 | Purchased 900 Units | 1.25 |
During 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 out of the purchases made on 08-Aug-19; 200 units out of the purchases made on 22-Aug-19; the rest 300 units out of purchases made on 31-Aug-19.
Calculate the value of the closing stock of the companyClosing Stock Of The CompanyClosing stock or inventory is the amount that a company still has on its hand at the end of a financial period. It may include products getting processed or are produced but not sold. Raw materials, work in progress, and final goods are all included on a broad level.read more at the end of August 2019 and the goods sold during August 2019.
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 August 2019;
Thus the value of the cost of goods sold for August 2019 is $ 1,315.
Advantages
- The first and most important advantage of using the Specific identification method is that it helps the business in keeping track of 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 every item used in the company individually. Whereas in the LIFO inventoryLIFO InventoryLIFO (Last In First Out) is one accounting method for inventory valuation on the balance sheet. LIFO accounting means inventory acquired at last would be used up or sold first.read more and FIFO methodsFIFO MethodsUnder the FIFO method of accounting inventory valuation, the goods that are purchased first are the first to be removed from the inventory account. As a result, leftover inventory at books is valued at the most recent price paid for the most recent stock of inventory. As a result, the inventory asset on the balance sheet is recorded at the most recent cost.read more, the cost is assigned to the inventory by grouping them based on specified criteria. It ensures a high degree of accuracy in the valuation of closing stock at the end of a particular period, and in the valuation of the cost of goods sold during the period.
Disadvantages
- As it tracks 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 effort 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 vast number of transactions, it is difficult to identify the purchased products, so this method is rarely used. It is restricted to businesses dealing with high-value items.
Important Points
- Under this method, every item sold during the period 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 is included in the cost of the goods sold during that particular period and cost of the items that remain 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 vital inventory valuationInventory Valuation Inventory Valuation Methods refers to the methodology (LIFO, FIFO, or a weighted average) used to value the company's inventories, which has an impact on the cost of goods sold as well as ending inventory, and thus has a financial impact on the company's bottom-line numbers and cash flow situation.read more concepts in accounting wherein each inventory item, and its associated cost is tracked to identify the critical items like Cost of goods soldCost Of Goods SoldThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more, beginning inventory and ending inventoryEnding InventoryThe ending inventory formula computes the total value of finished products remaining in stock at the end of an accounting period for sale. It is evaluated by deducting the cost of goods sold from the total of beginning inventory and purchases.read more. It 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 based on certain specified criteria.
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