Definition
The term goods in transit refers to merchandise and other inventory items that have been shipped by the seller, but not yet received by the buyer. The value of goods in transit is an important component of a company's inventory, since the shipping arrangement will determine when legal title to the merchandise passes from the buyer to seller.
Explanation
Also known as transit inventory, goods in transit is an important accounting component of inventory at the end of each fiscal period. The problem for accountants is to identify when legal title to the merchandise has passed from the seller to buyer. The concept has implications to the seller's valuation of inventory and accounts receivable, as well as the buyer's accounts payable.
The terms of the shipping agreement provides the guidance to understand when the title to the merchandise passes from the seller to buyer:
FOB Shipping Point or Origin: if the agreement is FOB (freight on board) shipping point, then the buyer agrees to pay for shipping, and takes legal ownership of the merchandise when it leaves the seller's shipping dock.
FOB Destination: if the agreement is FOB destination, the seller agrees to pay for shipping, and legal ownership of the merchandise passes to the buyer when it reaches their loading dock.
Example
On December 28th, Company A loads a truck with $200,000 in transformers FOB destination. The merchandise is being shipped from Company A's New York location to Company XYZ's California headquarters. The transformers are expected to arrive on January 3rd.
Since the merchandise is being shipped FOB destination, Company A retains ownership of the transformers until they arrive at Company XYZ on January 3rd. Therefore, Company A should include the $200,000 of transformers in its year-end inventory, and not record the sale or create an accounts payable until January 3rd.
Related Terms
The financial accounting term inventory is used to describe the balance sheet line item that includes the value of raw materials, work in process, finished goods ready for sale, and returned goods that can be resold.
Moneyzine EditorJanuary 22nd, 2024
Also referred to as "payables," this is the accounting term used to describe balances owed to trade partners for materials, supplies, goods and services that were purchased on credit. Accounts payable recognizes the timing difference between the company's receipt of the benefit or asset, and the payment for this expense.Moneyzine EditorDecember 12th, 2023.png)
The term consigned goods refers to a marketing arrangement whereby one party provides merchandise to a second party, who is responsible for selling the merchandise. The seller of the merchandise is paid a commission, and may be reimbursed for selling expenses, in exchange for providing this service.Moneyzine EditorJanuary 11th, 2024
The term buyback agreement refers to a business arrangement whereby one party sells inventory to a second party, with the promise to repurchase the inventory at a future point in time. As part of a buyback agreement, the selling party is able to finance its inventory without reporting either the liability or asset on the company's balance sheet.Moneyzine EditorJanuary 9th, 2024
The term cost of inventory refers to the expenditures associated with merchandise placed in inventory. The categories of costs associated with inventory include manufacturing, product, and period costs.Moneyzine EditorJanuary 12th, 2024- The term special sales agreements refers to situations where legal transfer of ownership does not align with the economic risk of ownership. The three most common forms of these special sales agreements include installment sales, merchandise with high rates of return, and buyback agreements.Moneyzine EditorSeptember 21st, 2023
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