What Are Goods in Transit?

In transit goods are goods that have been shipped prior to the financial statement date but had not yet been received by the buyer as of the financial statement date. The owner of the goods is determined by the terms of shipping.

• Goods sent FOB Shipping Point belong to the buyer from the moment the seller gives them to the shipping company. Thus, while the goods are in transit they belong to the buyer because title was transferred at the shipping point. Therefore, goods that have been shipped FOB Shipping Point by the end of the period should be included in the buyer’s ending inventory even though the buyer may not have received them by the end of the period. The goods should not be included in the seller’s ending inventory.
• Goods sent FOB Destination belong to the seller until the buyer receives them. While the goods are in transit, they belong to the seller and title is transferred at the destination point only when the buyer receives them. Goods shipped FOB Destination near the end of the period that have not been delivered to the buyer by the end of the period should be excluded from the ending inventory of the buyer and included in the ending inventory of the seller.

The issue of the owner of goods in transit is also connected to accounts receivable. For the seller, any individual shipment made near the end of a period should be reported on the period-end balance sheet as either inventory or as a receivable (or cash if the sale was a cash sale).

For example, a shipment shipped FOB Destination on December 30 that arrives on January 3 will be inventory on the seller’s books until January 3. On January 3, the seller’s accounts receivable is debited for the full amount of the sale and revenue is credited for the same amount; and cost of sales is debited for the cost of the sale while inventory is credited for the same amount. That shipment should never be shown on the seller’s books as both inventory and a receivable.

For the buyer, the item will be either 1) both inventory and a payable or 2) neither inventory nor a payable.