If you have some knowledge of the import and export business, you would definitely know about the goods in transit. Suppose you are a seller who just received an order for 1 tonne of coal from a buyer. You’ve just shipped with the coal, but reaching the buyer will take some time. These goods are in transit to the buyer, and you can simply say that these are goods in transit. Continue reading the blog article to learn about goods in transit’s meaning, some more detailed examples and how to do goods in transit accounting treatment.
Did you know?
Generally, there is a pre-fixed agreement between the buyer and the seller concerning which party should make goods in a transit accounting entry.
What are Goods in Transit?
The goods in transit are the list of those inventory items that were bought by a buyer and have been sold & shipped by a seller, but however, the goods are en route and have not been acquired by the buyer.
In simpler words, goods in transit are items that have been shipped by the seller but are yet to be checked in at the buyer’s storage facility. So, there is a possibility that these goods in transit are not noticed by either party and are not recorded during the overall inventory accounting since these items are not actually there at the storage facility of either the buyer or the seller.
If you are wondering what the significance of the goods in transit’s accounting entry is, it indicates which party, whether the buyer or the seller, has ownership of the goods in transit and which party has paid the cost related to the shipment. Don’t get confused. We’ll clear all these things for you with some examples.
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Goods in Transit Examples
Here are some great goods in transit examples for you to understand the two different conditions when the goods are considered to be in transit:
Example 1:
Suppose there is a seller named ‘Company S’ and a buyer named ‘Company B’.
Company B placed an order for exporting gold worth ₹35,000 on June 20th, 2022. Company A acknowledges the order and confirms the order to Company B on June 21st, 2022. On June 22nd, 2022, Company A ships the inventory consisting of gold worth ₹35,000 to Company B. The shipment is scheduled to arrive at the storage facility of Company B on August 1st, 2022. Now, the question is whether Company A or Company B is supposed to make the goods in transit accounting entry if the pre-fixed agreement for the delivery freight was on board (FOB) shipping point.
The FOB shipping point indicates that Company B (buyer) will be assuming the ownership of the freight after it leaves the shipping point of Company S (seller). Therefore, Company S will make a sales entry for the date of June 22nd, 2022 and Company B will make goods in transit journal entry also for June 22nd, 2022.
Example 2:
For this example also, we assume the same scenario with Company S (seller) and Company B (buyer). The shipment is scheduled to arrive at the shipping storage facility of Company B on August 1st, 2022. The only thing that changed is that the pre-fixed agreement for the delivery FOB was on the destination, not the shipping point.
In the case of FOB destination, Company B will make a sales entry for the date of August 1st, 2022, which differs from the sales entry made by Company S (i.e. June 22nd, 2022).
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Valuation of Goods in Transit
Now that we know how to conduct the goods in transit entry for both parties in the case of FOB destination and FOB shipping point let’s learn about how to make a valuation of the goods in transit.
The goods in transit valuation include the cost of the goods and the shipping costs. Assume that a shipment from Country A to Country B takes about 45 days to reach. The shipping cost of the goods can be found depending on the cost of the goods in the shipping carrier. Let’s assume that the cost of goods is about ₹6,00,000 and the shipping cost is fixed at 15% of the case of goods.
Therefore, we can calculate the average shipment value per day as,
Average Shipment Value Per Day = (Cost of Goods * Shipping costs) / 365
- Average Shipment Value Per Day = (₹6,00,000 * 15%) / 365
- Average Shipment Value Per Day = ₹90,000 / 365
- Average Shipment Value Per Day = ₹246.57
And we can calculate the shipping cost from Country A to Country B as,
Shipment Cost = Average Shipment Value Per Day * Number of days that the goods are in transit
- Shipment Cost = ₹246.57 * 45
- Shipment Cost = ₹11,095.65
Hence, the valuation of goods in transit is ₹6,11,095.65 (equivalent to ₹6,00,000+₹11,095.65)
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Goods in Transit Accounting Treatment
The proper method of goods in transit accounting treatment is explained below:
When the shipping service agent generates the transportation document like Air Way Bill (AWB) or Bill of Lading, etc., then the goods in transit journal entry will be recorded as:
- Debit – Goods in transit account
- Credit – Goods receipt account
When the goods are in transit but have not reached the buyer yet, then the goods in transit journal entry will be recorded as:
- Debit – Goods receipt account
- Credit – Seller account
When the goods are delivered to the buyer, then the goods in transit entry will be recorded as:
- Debit – Stock account
- Credit – Goods in transit account
How to Record Goods in Transit?
From a practical point of view, the buyer might not record the goods in transit until they arrive at the destination. This can pose a major issue when the delivery terms are fixed as FOB shipping points because the shipping agency makes a journal entry at the time of shipment, and the buyer does not make a journal entry until the goods are received at the destination. Therefore, none of the parties (buyer nor seller) makes a journal entry for the goods when they are in transit from the seller to the buyer.
The goods in transit have to be recorded in the accounting journals of either the buyer or the seller, and it depends on the pre-fixed terms and conditions of the shipping. The most commonly used terms and how to record the goods in transit according to those terms are discussed below:
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FOB Shipping Point
When the pre-fixed terms and conditions of the delivery are mentioned as FOB shipping points, it signifies that the ownership of the goods in transit is handed over to the buyer right after the shipment of the goods leaves the storage facility of the seller.
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FOB Destination
When the pre-fixed terms and conditions of the delivery are mentioned as FOB destination, it signifies that the ownership of the goods in transit is handed over to the buyer only when the shipment of the goods reaches the storage facility of the buyer.
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Conclusion:
The goods in transit are the inventory of goods that have been shipped by the seller of the goods but have not yet reached the storage facility of the buyer. The goods in transit indicate that the goods are on their way to being delivered to the buyer. The main purpose of acknowledging the goods in transit is to identify the terms and conditions regarding when the ownership of the goods is transferred from the seller to the buyer.
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