Goods in transit are purchased goods that have not yet been received by the purchaser. These goods are easily overlooked when counting the ending inventory because they are not physically located at either the seller's or the purchaser's warehouse. When accounting for goods in transit, the fundamental question is whether a sale has taken place, resulting in the passage of title to the buyer. When this happens, the seller records a sale and a receivable or cash and does not include the item in the ending inventory. The purchaser records the payable or the payment of cash and the purchase and includes the item in the ending inventory. Conversely, if the title has not passed, no sale or purchase has taken place. For this reason, the inventory is included in the seller's ending inventory. From a legal standpoint, the title passes from one party to the other when the goods reach the FOB point. Therefore, when goods are shipped to the FOB shipping point, the title passes from the seller to the buyer at the shipping point. When a title passes, the seller recognizes the sale and the buyer recognizes the purchase; alongside this, the inventory is included in the buyer's ending inventory. If goods are shipped under FOB destination, the title does not pass until the goods reach the buyer's receiving point. In this situation, goods in transit belong to the seller, and neither a sale nor a purchase is recorded until the goods reach the buyer.Goods in Transit: Definition
Accounting Treatment of Goods in Transit
Goods in Transit FAQs
Goods in transit are purchased goods that have not yet been received by the purchaser. These goods are easily overlooked when counting the ending inventory because they are not physically located at either the seller’s or the purchaser’s warehouse.
The accounting of goods in transit shows whether the seller or buyer owns the goods and who paid the shipping costs. There is usually an agreement (shipping terms) between the seller and the buyer on who records these goods in their accounting records.
If the title to the goods has not been transferred from the seller to the buyer, an asset loss cannot be claimed because no actual physical loss of the goods has occurred. In this case, the title of ownership has not been transferred, so the goods belong to the seller. The loss is recorded as an expense debit against net income. If goods are shipped fob destination, and they never reach their destination but are lost or destroyed through no fault of either party, then neither party can claim ownership. Both parties have a claim that must be resolved through an insurance claim or legal procedures. If goods are shipped fob destination, and they never reach their destination but are lost or destroyed due to the fault of one party, the loss is recognized in the accounting records by one party. If this was not picked up in its entirety by insurance, then it becomes an income statement item for the party who was at fault.
In order to record an account as "goods in transit, " there must be evidence that the title has been transferred from the seller to the buyer. This is normally done through a possession or control contract.
At the time of shipment, the goods are recorded at their invoice price. If they are not received within a year or if there is no reasonable assurance that they will be received, then the asset account for these items is written off as a loss. Any insurance settlement would result in an offset to this loss.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
