Specific Identification Financial Accounting

Clearly the method used to determine which units are sold and which remain in closing inventory determines the value of the cost of goods sold and the closing inventory. As profit depends on the cost of goods sold, the method chosen will affect the profits of a business. The specific identification inventory valuation method tracks the cost of each individual item. Companies use this approach to know exactly how much they paid for an item in their inventory. The COGS under the specific identification method is the sum of all the costs assigned to inventory units that were sold during the period. Similar to ending inventory, it’s very easy to determine the specific inventory units sold and to identify the cost of those units.

• Ending inventory cost – This is the final step where the remaining items are valued at their specific costs.
• The exact cost at which something was purchased is recorded in the inventory records and charged to the costs of goods sold when the related item is sold.
• It’s an inventory costing method that suits businesses with high-value, low-volume goods.
• As profit depends on the cost of goods sold, the method chosen will affect the profits of a business.
• Assume you bought several lots of security A over the year while the stock increased in price.

Useful for distinguishable and high-value items

Specific valuation accounting is a technique used for the valuation of inventory by assigning individual costs to each item rather than grouping them. This method helps the company to keep a track of every inventory item from the time it is purchased till the time it is finally sold. The specific identification method is used to track individual items of inventory.

What Is the Specific Identification Method for Inventory?

Obviously, this inventory method takes more work upfront than the alternatives. It might not be a reasonable use of time for a seller of t-shirts or candles. But it could be very useful to a seller of a wide variety of merchandise who wants a steady stream of information on what products or styles are in demand, what’s not selling, and what needs restocking. In general, businesses traditional vs contribution margin income statement definition meanings differences with high-value and slow turnover goods would benefit from this method. Examples of these businesses would be vehicle dealerships, jewelry and luxury stores, furniture warehouses, and art galleries, to name a few. On the 15th of December, preparing for the holiday rush, we bought eight more bats, but the cost has gone up (probably due to higher demand) to $15 each.

FIFO Vs. Specific Identification Accounting Methods

The specific identification method of assigning costs only works when inventory can be recognized and matched with an invoice or shipping document that clearly shows the cost of the purchase. When the inventory arrives, each piece is matched the invoice to allocate the cost. It can be more complex because it requires detailed tracking of individual items in inventory. Companies often use this method for expensive or unique items where tracking individual costs makes sense. Specific identification inventory valuation is often used for more expensive items such as furniture or vehicles.

Most businesses sell products that are essentially interchangeable. The specific identification inventory method is a way of determining the cost of goods sold and the value of the ending inventory. The method can only be applied when each item of inventory can be specifically identified and tracked from purchase to sale, and therefore tends to be used for low volume, high priced items. You may have come across various methods like FIFO, LIFO, or weighted average, but each has its unique approach and implications for your financial statements.

Imagine being able to pinpoint exactly what you spent on every piece of jewelry in your store; that precision is what specific identification brings to the table. This method of identification allows investors to reduce or offset capital gains by picking a specific lot of securities to be used as the basis for a sale. Our bookkeeping guide discusses how inventory tracking relates to the whole bookkeeping process. Ending inventory cost – This is the final step where the remaining items are valued at their specific costs.

For businesses dealing with items like jewelry or art, this method gives a clear picture of financial health. It tracks individual item costing which helps in accurate profit calculation and asset tracking. A major advantage of the specific identification method is the high degree of accuracy when calculating the cost of inventory. The exact cost at which something was purchased is recorded in the inventory records and charged to the costs of goods sold when the related item is sold. This eliminates the use of inventory layering or weighted averaging, which are quite common when large numbers of the same items are stored on the premises.

The financial concept of specific identification method of inventory valuation has some advantages, as given below. But there is another option called the Specific Identification (SI) accounting method. Assume you bought several lots of security A over the year while the stock increased in price. You might prefer to use SI accounting instead of FIFO to specify a higher cost-basis lot to reduce your short-term capital gains for 2021. This enables you to hold the older purchased stock for 12 months at a lower cost-basis for a long-term capital gain taxed at a lower rate (up to 20% for 2021 and 2022). Notice this system is exactly the same as if the company was using the periodic system because, under specific identification, we are assigning costs to individual units as they are sold.

Thus, the closing stock value at the end of August 2019 is $ 2,420.