What does specific identification method involve when accounting for inventory?

The specific identification method involves assigning a specific cost to each inventory item. This approach is particularly relevant for businesses that sell distinct, easily identifiable items, such as automobiles, fine jewelry, or real estate. It allows a company to directly track the cost of individual items as they are sold or remain in inventory.

This method is beneficial because it provides precise matching of revenues and costs, making it easier for businesses to determine the exact profit from each sale. For instance, if a company sells a specific car, it records the exact cost associated with that specific vehicle rather than using averages or estimates, thus ensuring that the financial statements reflect the actual expenses incurred.

In contrast, other methods like using the average cost or automatically determining the cost at the point of sale do not involve this kind of individual tracking and can lead to less accuracy in matching costs and revenues.