Goods In Transit Meaning Examples Accounting Treatment

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.

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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 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.read more, 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 = $60,000 x 20% / 365Average Shipment Value per Day = $12,000 per year / 365Average 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 * 30Cost 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.read more, invoice or air waybill), then the journal entry will be:

Goods in transit account to be debitedGoods/ 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 debitedSupplier account to be credited

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

Stock accountStock AccountStock accounting is the process of recording the transactions entered into by a business enterprise beginning with investments made by anyone, whether a corporation or an individual, in the company in exchange for the issuance of something that can be easily traded in the open market.read more to be debitedGoods 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 pointFOB 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.