Goods in Transit

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Goods in Transit Meaning

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.

Goods in Transit Meaning

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:

FOB shipping point
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.