What Is the Specific Identification Method?
Understand the Specific Identification Method, an inventory costing approach that accurately tracks and assigns the unique cost of individual items.
The specific identification method is an inventory costing approach used in accounting to precisely track the cost of individual items. It directly matches the exact purchase cost of a specific inventory item to the revenue it generates when sold. This method is one of several inventory costing techniques businesses use to value their goods.
How Specific Identification Works
The fundamental principle of the specific identification method involves tracking each inventory item individually from its acquisition to its eventual sale. Businesses assign a unique identifier, such as a serial number, batch number, or vehicle identification number (VIN), to each item or group of items as they are purchased.
Upon acquiring inventory, the exact purchase cost for each uniquely identified item is meticulously recorded in the accounting system. When one of these items is subsequently sold, its specific, recorded cost is then removed from the inventory account and recognized as the Cost of Goods Sold (COGS) on the income statement. For example, a car dealership might track each vehicle by its VIN, associating its precise purchase cost with that specific car. When that particular car sells, its exact cost becomes part of the COGS. This method directly links the physical flow of goods with their corresponding cost flow, providing a precise accounting of inventory value and expenses.
When to Apply Specific Identification
The specific identification method is particularly suitable for businesses dealing with inventory that possesses certain characteristics. It is most effective for items that are unique, easily distinguishable, and not interchangeable with other similar goods. This method typically applies to low-volume inventory items that carry a high unit cost.
Industries where this method is commonly employed include art galleries, antique dealers, custom furniture makers, and luxury car dealerships. Real estate developers also find this method appropriate for tracking individual properties. The suitability stems from the ability to physically track each individual item and the inherent significance of each item’s specific cost.
Financial Statement Impact
Using the specific identification method directly influences a company’s financial statements by providing a precise reflection of actual costs. This method impacts the Cost of Goods Sold (COGS) by ensuring it includes the exact cost of the specific inventory items sold. This leads to a direct and accurate matching of the revenue generated from a sale with the specific expense incurred to acquire that item.
Furthermore, the value of ending inventory on the balance sheet is determined by the exact cost of the specific items that remain unsold at the end of an accounting period. This approach results in inventory and COGS figures that closely align with the physical flow of goods, generally providing the most accurate representation of a company’s inventory value. However, if a business purchases identical items at varying costs, the specific identification method allows for the strategic selection of which item to sell, which can influence reported profits and tax liabilities depending on whether higher or lower cost items are chosen for sale.