Definition of Goods in Transit
Goods in transit refers to inventory items and other products that have been shipped by a seller, but have not yet reached the purchaser.
When goods are in transit at the end of an accounting period, they require special accounting attention since the goods are not physically present at either the seller's or the buyer's location. It is necessary to examine whether the sales terms were FOB shipping point or FOB destination. The rules to be followed are:
- If the terms are FOB shipping point, the goods in transit are the property of the buyer
- If the terms are FOB destination, the goods in transit are the property of the seller
Example of Goods in Transit
Let's assume that both a company (seller) and its customer (buyer) have accounting periods which end on December 31. The company ships a truckload of merchandise on December 30 to a customer who is located 2,000 miles away. The merchandise arrives at the customer's location on January 2. Between December 30 and January 2, the merchandise is an example of goods in transit.
If the terms are FOB shipping point, the company (seller) will record a sale and receivable as of December 30, and will not include the goods in transit as its December 31 inventory. On December 31, the customer (buyer) is the owner of the goods in transit and will need to report a purchase, a payable, and must include the cost of the goods in transit in its inventory cost.
If the terms of the sale are FOB destination, the company (seller) will not have a sale and receivable until January 2. This means the company (seller) must include the cost of the goods in transit in its inventory as of December 31. [The customer (buyer) will not have a purchase, payable, or inventory of the goods as of December 31. The customer's (buyer's) purchase, payable, and increase in inventory will occur on January 2.]