Goods in Transit

Goods in transit refer to the inventory items that have been purchased by the buyer and shipped by the seller; however, the goods are on the way and yet to reach the intended purchaser. At the end of the accounting period, such inventory items warrant special attention for accounting. These goods are neither available at the seller’s nor the purchaser’s site.

Table of contents

• Goods in Transit Meaning
  • Explanation
  • Examples
    • Example #1
    • Example #2

    Explanation

    These are inventory items shipped by the seller but have yet to reach the buyer’s warehouse. There is a likely chance that these goods can end up unnoticed during accounting for overall inventory since these goods are not physically present at either the purchaser’s or the seller’s place. The accounting of goods in transit indicates whether the seller or the purchaser has the ownership and who has paid for transportation. Typically, there is an agreement (shipping terms) between the seller and the buyer regarding who should be recording these goods in the accounting records.

    

    Examples

    Let's see the following examples.

    Example #1

    Let us take an example in which SDF Inc. is the seller, and BDF Inc. is the purchaser. SDF Inc. ships merchandise worth $50,000 on January 15, 2020, and it is yet to reach BDF Inc. Determine which company should record the goods in transit in their accounting books if the terms of the delivery freight are on board (FOB)shipping point.

    The FOB shipping point means that BDF Inc. (purchaser) will take ownership of the merchandise after leaving SDF Inc.’s shipping dock. Consequently, SDF Inc. will record a sales transaction on January 15, 2020, while BDF Inc. will record it as transit inventory for the same date.

    Example #2

    Let us take another example wherein, again, SDF Inc. is the seller, and BDF Inc. is the purchaser, but the delivery terms have been changed to FOB destination, and the shipment is yet to reach BDF Inc. 's dock. The merchandise is expected to be delivered on February 5, 2020. In this case, determine which company should record the goods in transit in their accounting books.

    Under FOB destination, the purchaser will record the sale transaction on February 5, 2020, instead of January 15, 2020. So, in this case, the journal entry will be recorded by BDF Inc. in its books of account on February 5, 2020. Consequently, there will be a difference between the seller’s and purchaser’s book due to shipment terms. Therefore, while BDF Inc. will record the transaction on February 5, 2020, SDF Inc. will record the same transaction on January 15, 2020.

    Valuation of Goods in Transit

    The valuation of goods in transit also includes the cost of transportation and the merchandise cost. Let us take the example of a shipment from Los Angeles to Guanta that takes approximately 30 days. The cost of transportation of the in-transit inventory can be calculated based on the annual inventory cost of the merchandise. Let us assume the cost of logistics is20% of the merchandise cost, which is again assumed to be $60,000.

    Therefore, the average shipment value per day can be calculated as,

    Average Shipment Value per Day = Merchandise Cost * Logistic Charge / 365
    • Average Shipment Value per Day = $60,000 x 20% / 365
    • Average Shipment Value per Day = $12,000 per year / 365
    • Average Shipment Value per Day = $32.87 per day

    Therefore, the cost of transportation from Los Angeles to Guanta can be calculated as,

    Cost of Transportation = Average Shipment Value per Day * No. of Days of Transit
    • Cost of Transportation = $32.87 * 30
    • Cost of Transportation = $986

    So, the cost of good in transit will be $60,986 (= $60,000 + $986).

    Accounting Treatment of Goods in Transit

    The accounting treatment is illustrated below:

    When the forwarding agent prepares the shipping documents (such as the bill of lading, invoice or ar waybill), then the journal entry will be:

    • Goods in transit account to be debited
    • Goods/ Invoice receipt account to be credited

    When the stock is in transit but yet to be received by the purchaser customer, then the journal entry will be:

    • Goods/ Invoice receipt account to be debited
    • Supplier account to be credited

    When the merchandise is received by the purchaser, then the journal entry will be:

    • Stock account to be debited
    • Goods in transit account to be credited

    How to Record it?

    The recording of goods in transit in either the seller's or the buyer's accounting books depends on the terms of shipping, which are:

    1. FOB shipping point
    2. FOB destination

    FOB Shipping Point: When the shipping terms say FOB shipping point, the ownership of goods in transit is transferred to the buyer once the shipment leaves the seller’s warehouse.

    FOB Destination: When the shipping terms say FOB destination, the ownership of goods in transit is transferred to the buyer only when the buyer receives the shipment.

    Conclusion

    Goods in transit basically specify when the title of ownership and risk passes from the seller to the buyer.

    Recommended Articles

    This article has guided what is Goods in Transit and its meaning. Here we discuss the accounting treatment of goods in transit and examples, recording & valuations. You can learn more about financing from the following articles –

    • Full Form of FOB
    • Spoilage
    • Cost, Insurance and Freight (CIF)
    • Full Form of CIP
    Learn the foundation of Investment banking, financial modeling, valuations and more.

    

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