Key Points:
- Ownership of transit goods is determined by the terms of shipping agreement.
- Free on Board (F.O.B) shipping point means the ownership will be transferred when the goods are on board at shipping point.
- Free on Board Destination means, the ownership of goods is transferred when the goods are arrived at destination.
What is Goods in Transit?
Goods in Transit refers to the goods that is left the shipping dock of the seller, but not yet reached the receiving dock of the buyer. Goods in transit concept is used to indicate whether the buyer or seller of goods has taken possession, and who is paying for transport.
How Goods in Transit is recorded?
Whether the buyer or seller record goods in transit in its accounting records depends upon its shipping terms associated with the goods, which are:
- FOB Shipping Point
- FOB Destination
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 i.e. Ownership of goods will be transferred when the goods are on board at shipping point.
For example, ABC International ships $10,000 of merchandise to Siams Superior Limited on November 28 with terms of F.O.B. Shipping point and the goods arrived at the destination on 31st December. The terms of the delivery are FOB shipping point. Since these terms mean that Siams Superior Ltd 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 Siams Superior Ltd should record an inventory receipt on the same date.
FOB Destination
- 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.
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.
The Journal Entry in this respect will be recorded in buyer’s books of account on December 2, instead of November 28. The difference will arise in buyer’s and seller’s book due to shipment terms. The seller’s will record on November 28 but buyer’s will record it on December 2.
Accounting Treatment of Goods In Transit
- When forwarding agent sends shipping documents (Invoice, Bill of Lading or Air Way Bill) by mail, the stock in transit to be accounted for based on the shipping documents. The journal entry will be:
| Stock in Transit A/c | Debit |
| Clearing A/c (Goods Receipt/Invoice Receipt-GR/IR A/c) | Credit |
2. Based on the shipping documents, supplier liability will be booked (Stock on board but not received by customer)
| GR/IR A/c | Debit |
| Supplier A/c | Credit |
3. When goods received by the customer, the accounting entries will be :
| Stock A/c | Debit |
| Stock in transit A/c | Credit |
Conclusion
Point to be noted that in practical the buyer may not record inventory until it arrives at the receiving deck. This causes a problem under FOB Shipping point terms, because the seller record the transaction at the point of shipment, and the buyer 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.