Goods in Transit: Definition
Goods in transit are purchased goods that have not yet been received by the purchaser. These goods are easily overlooked when counting the ending inventory because they are not physically located at either the seller’s or the purchaser’s warehouse.
Accounting Treatment of Goods in Transit
When accounting for goods in transit, the fundamental question is whether a sale has taken place, resulting in the passage of title to the buyer.
When this happens, the seller records a sale and a receivable or cash and does not include the item in the ending inventory. The purchaser records the payable or the payment of cash and the purchase and includes the item in the ending inventory.
Conversely, if the title has not passed, no sale or purchase has taken place. For this reason, the inventory is included in the seller’s ending inventory.
From a legal standpoint, the title passes from one party to the other when the goods reach the FOB point. Therefore, when goods are shipped to the FOB shipping point, the title passes from the seller to the buyer at the shipping point.
When a title passes, the seller recognizes the sale and the buyer recognizes the purchase; alongside this, the inventory is included in the buyer’s ending inventory.
If goods are shipped under FOB destination, the title does not pass until the goods reach the buyer’s receiving point. In this situation, goods in transit belong to the seller, and neither a sale nor a purchase is recorded until the goods reach the buyer.