Goods in Transit
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.
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.
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.