Goods in transit refers to 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. The concept is used to indicate whether the buyer or seller of goods has taken possession, and who is paying for transport.
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 from the seller to the buyer.
The delay in recording the receipt of goods by the buyer is not really a problem, as long as the business refrains from also recording the related account payable until such time as it records the related inventory. Otherwise, there will be a mismatch between the asset and related liability.
Goods in transit are also known as stock in transit and in transit inventory.