What is meant by goods in transit?
Goods in transit are goods that have been purchased but have not yet been received by the purchaser. These goods can be 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
In accounting for goods in transit, the main question is whether a sale has taken place, resulting in the passage of title to the buyer. If this is the case, 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 title has not passed, no sale or purchase has taken place, and thus the inventory is included in the seller’s ending inventory.
As we noted, from a legal standpoint, title passes when goods reach the FOB point. Therefore, when goods are shipped FOB shipping point, title passes from the seller to the buyer at the shipping point. Because title has passed, the seller recognizes the sale; the buyer recognizes the purchase; and the inventory is included in the buyer’s ending inventory. If goods are shipped FOB destination, 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.