What are goods in transit?
Sunday, January 30, 2011 at 12:34PM Goods in transit are merchandise and other types of inventory that have left the shipping dock of the seller, but not yet reached the receiving dock of the buyer.
Ideally, either the seller or the buyer should record goods in transit in its accounting records. The rule for doing so is based on the shipping terms associated with the goods, which are:
- FOB shipping point. If the shipment is designated as freight on board (FOB) shipping point, ownership transfers to the buyer as soon as the shipment departs the seller.
- FOB destination. If the shipment is designated as freight on board (FOB) destination, ownership transfers to the buyer as soon as the shipment arrives at the buyer.
For example, ABC International ships $10,000 of merchandise to Aruba Clothiers on November 28. The terms of the delivery are FOB shipping point. Since these terms mean that Aruba takes on ownership of the merchandise as soon as they leave ABC's shipping dock, ABC should record a sale transaction on November 28, and Aruba should record an inventory receipt on the same date.
Assume the same scenario, but the terms of delivery are now FOB destination, and the shipment does not arrive at Aruba's receiving dock until December 2. In this case, the same transactions occur, but on December 2 instead of November 28. Thus, under the FOB destination shipping scenario, ABC does not record a sale transaction until December.
From a practical perspective, the buyer may not have a procedure in place to record inventory until it arrives at the receiving dock. This causes a problem under FOB shipping point terms, because the shipping entity records the transaction at the point of shipment, and the receiving company does not record receipt until the transaction is recorded at its receiving dock - thus, no one records the inventory while it is in transit.
Similar Terms
Goods in transit are also known as stock in transit and in transit inventory.
Related Topics
How do I ensure a proper inventory cutoff?
When do I take ownership under FOB terms?
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