Goods in Transit Meaning
Goods in Transit refers 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 the purpose of accounting these goods are neither available at the seller’s place nor at the purchaser’s site.
These are inventory items that have been shipped by the seller but are yet to reach the buyer’s warehouse. There is a likely chance that these goods can end up unnoticed during the process of 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 of the goods 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.
Let’s see the following examples.
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 on board (FOB)shipping point.
FOB shipping point means that BDF Inc. (purchaser) will take ownership of the merchandise once it leaves 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.
Let us take another example wherein again SDF Inc.is the seller and BDF Inc. is the purchaser, but the terms of delivery 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. Determine which company should record the goods in transit in their accounting books in this case.
Under FOB destinationFOB DestinationFree On Board Destination implies that the ownership of the goods supplied from a foreign country is transferred to the purchaser of the goods only when the goods reach the buyer's specified location. Hence, the seller bears all the goods losses that occur during the transit., 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 owing to the terms of shipment. While BDF Inc. will record the transaction on February 5, 2020, but 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 along with the cost of the merchandise. 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 on the basis of 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 = $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 = $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 ladingBill Of LadingBill of lading is the legal document issued by the carrier to the shipper. It captures all the details about the shipment, such as quantity, type, and destination of the consignment. It serves as the shipment receipt when the carrier hands over the consignment to the intended merchant., invoice or air 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:
- FOB shipping point
- FOB destination
FOB Shipping Point: When the shipping terms say FOB shipping point, it means that 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, it means that the ownership of goods in transit is transferred to the buyer only when the shipment is received by the buyer.
Goods in transit basically specify when the title of ownership and risk passes from the seller to the buyer.
This article has been a guide to What is Goods in Transit and its meaning. Here we discuss the accounting treatment of goods in transit along with examples, recording & valuations. You can learn more about financing from the following articles –