Goods in Transit
Goods in transit refers to inventory items that have been shipped by a seller, but not yet received by the buyer. These items are not physically present at either the seller’s or the buyer’s location. They are generally in transit via a third-party logistics provider, for example, a shipping company, courier, or freight carrier.
The accounting treatment of goods in transit is an important consideration in terms of revenue recognition and inventory management. The ownership of goods in transit depends on the terms of sale between the buyer and the seller, such as Free on Board (FOB) shipping point or FOB destination.
- FOB Shipping Point: The ownership of goods is transferred to the buyer as soon as the seller dispatches the goods. In this case, the goods in transit are included in the buyer’s inventory even though they have not physically received the goods.
- FOB Destination: The ownership of goods is transferred to the buyer only when they receive the goods. In this case, the goods in transit are still part of the seller’s inventory.
Therefore, goods in transit require special consideration in both financial accounting and supply chain management. Mismanagement or misinterpretation of goods in transit can lead to discrepancies in inventory counts and financial records.
Example of Goods in Transit
An example for both FOB Shipping Point and FOB Destination.
- FOB Shipping Point
Let’s assume Company A manufactures electronic equipment and sells a batch of computers to Company B on June 28. The terms of the sale are FOB Shipping Point, and Company A ships the goods on the same day. The shipment is expected to arrive at Company B on July 2.In this case, as soon as the shipment leaves Company A’s premises on June 28, the ownership is transferred to Company B. Even though Company B has not received the goods physically, these goods are counted in Company B’s inventory from June 28. Company A would record the sale and remove these goods from its inventory on June 28.
- FOB Destination
Now consider the same scenario, but the terms of the sale are FOB Destination. Company A sells and ships a batch of computers to Company B on June 28, and the goods are expected to arrive at Company B on July 2.Here, the ownership of the goods remains with Company A until they are received by Company B on July 2. Therefore, these goods remain in Company A’s inventory until July 2. Only when Company B receives the goods does Company A record the sale and remove the goods from its inventory. At the same time, Company B adds these goods to its inventory.
This is a simplistic view, and real-life scenarios might involve additional complexities, such as the possibility of goods being damaged in transit or returned by the buyer. However, the example should give you a good understanding of how goods in transit are treated under different shipping terms.