Accounting for Goods in Transit Simplified

PackageIt Team • February 16, 2022

You have inventory. You ship products. Accounting for those products in shipping can be confusing. That is where familiarity with the term ‘goods in transit’ is important.

Understanding this concept can help your business make a more accurate account of your inventory, which can help with your accounting and bookkeeping. Here’s a quick rundown of all the things you need to know about goods in transit:

What Are Goods in Transit?

Goods In Transit (GIT), or Transit Inventory, are merchandise or other types of inventory that have already left a seller and are on their way to the buyer.

This concept is mainly used to determine the inventory’s ownership status and who is going to pay for their shipment costs.

Most of the time, since these goods are still on their way and not physically present in either the seller or buyer’s warehouse, both of them can end up with inaccurate inventory valuation.

Sale transactions with delivery usually have shipping terms that are agreed upon by both parties. Checking these records can be helpful if you want to determine who already has ownership of the goods in question and whether or not you should pay for its shipment costs.

Types of Goods in Transit

There are two general types of goods in transit. Each of them indicate who owns the inventory and who should pay for their shipments.

FOB Destination

The first type of GIT is Free On Board Destination, or simply FOB Destination. This type of GIT means that ownership of the inventory is only transferred to the buyer once it reaches its target location. This transfer of ownership implies that in the event that the inventory gets lost or damaged while in transit, the seller will bear all the losses incurred.

Furthermore, the shipping cost will be paid by the seller in this arrangement.

FOB Shipping Point

The second type of GIT would be FOB Shipping Point, which means that the ownership of the inventory is transferred to the buyer as soon as it reaches the dock and boards the ship.

Consequently, all the risks of loss and damage incurred to the inventory while it is in transit are shouldered by the buyer, unlike FOB Destination. The buyer will also pay for the shipping costs of the inventory.

Other Shipping Terms

While FOB Destination and Shipping Point are terms that determine the transfer of ownership of inventory while they are in transit, shipments can also be more nuanced when combined with additional terms such as FAS and CIF, which determine the additional costs that will be shouldered by either party.

Free Alongside Ship

This term is usually used in international exports where there is a need to transfer goods between ships. With this term, the goods in transit are now considered delivered if they are already delivered to the buyer’s designated ship or docking point.

You should not confuse this with FOB Destination since FAS transfers ownership once the inventory is transferred to a ship or a docking point, instead of a buyer’s location. Once this happens, the buyer will then shoulder the costs of possible loss and damage incurred to the inventory.

Cost, Insurance, and Freight

This is also a term used for international shipping agreements which basically represents all the expenses of the seller for costs, insurance, and freight.

CIF can only be used in shipments that are transported through the oceans, seas, and rivers. This cannot be applied to shipments by land or air.

This is important to remember, since if the inventory arrives at the docking point and is transported on land, all the fees incurred for shipments such as loading and unloading will now be shouldered by the buyer instead.

Accounting Treatment for Goods in Transit

The fundamental question that needs to be answered with GIT is if a sale has already taken place, what happens with transferring ownership and creating the appropriate entry for a company’s inventory accounts?

As we discussed above, FOB Shipping Point records the transfer of ownership once it reaches the docks. This means that the seller should exclude said shipment from their inventory. Conversely, the buyer should include the shipment in their ending inventory valuation.

On the other hand, FOB Destination only transfers the ownership of the shipment once it reaches the buyer’s destination. This means that the only time that the seller can exclude the shipment from their inventory is when it reaches the doorsteps of its buyer.

Manage Your Inventory With PackageIt

PacakegIt has years of packaging, shipping, and warehousing expertise and will help you save on your inventory and packaging needs.

As a family-run business, our company is known for its innovative solutions that are aimed at providing you with the best solutions for packaging, shipping and warehousiing. Our core values of dedication, efficiency, and trust ensure that our service will never be about maximizing our sales but to provide you with trustworthy service, protecting your shipment and making your customers happy.

Contact a packaging specialist at 888-743-0907 today for packaging strategies and a custom packaging estimate. At PackageIt, we make certain our clients stay in the ‘know’ and can always count on our dedication to exceptional service.

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