GOODS IN TRANSIT: CLASSIFICATION AND PURPOSE - DUDAS - 2024

The transit goods are inventory items that have been sent by the seller, but have not yet been received by the buyer. The concept is used to indicate at any given time who has possession of the items (whether the buyer or the seller), depending on who is paying for the transport.

In this globalized world, companies are constantly sending and receiving goods through local and international trade. These goods, after leaving the seller's facilities, often have to travel long distances by sea, river, land and / or air, to reach the place where the customer is.

The duration of the itinerary can be days, weeks or months, due to the great distances that may exist between the point of shipment and the destination, the means of transport used and the legal and operational procedures to which the merchandise must be subjected. on your way. This merchandise is also called inventory in transit.

Classification

While the merchandise is in transit, who owns it: the seller or the buyer? Based on this question, goods in transit are basically classified into:

- Merchandise in transit owned by the seller.

- Merchandise in transit owned by the customer.

The terms of the shipping agreement provide a guide to understanding when ownership of the merchandise passes from the seller to the buyer.

Before shipping the merchandise, the buyer and the seller must reach an agreement on who will be responsible for paying the freight costs and who will risk loss during transit.

Transfer point

The fundamental question is: at what point does ownership of the merchandise transfer from the buyer to the seller? The point of this transfer is called the FOB point (Free On Board), a term usually used in international trade.

The point at which ownership is transferred from the seller to the buyer is very important to consider; it will determine who pays the transportation costs and associated costs (such as insurance) while the merchandise is in transit. The person responsible for paying the shipping costs is also the guarantor of insuring the merchandise during transit.

There are two alternate points to make this transfer:

FOB shipping point

Also known as FOB origin. It means that the buyer accepts ownership of the goods at the seller's place of shipment.

The buyer is responsible for paying the shipping costs. You become the owner of the merchandise and run the risk of damage or loss when it is in transit.

The items also become part of the buyer's inventory of merchandise in transit at the point of shipment.

FOB destination

It means that the ownership of the goods is transferred to the buyer when they are delivered to the place of destination.

This means that the seller is responsible for paying the shipping costs. You also assume the risk for damage or loss of the merchandise during transit. The seller does not record the proceeds from this sale until the goods arrive at the destination, because this transaction is not completed before that point.

Merchandise can be stored for any reason while in transit. It is common for a company to use a warehouse, dock, or other third-party facilities for this purpose.

When using a public storage facility, the operator of the facility is not responsible for paying taxes due on merchandise stored there.

This may not be the case if your company is the owner of the storage facility. As it is in physical possession of the merchandise, it can be considered as inventory for tax purposes.

Purpose

Goods in transit are an important accounting component of inventory at the end of each fiscal period. The problem for accountants is identifying when legal ownership of the merchandise has passed from the seller to the buyer.

The concept has implications for the seller in the valuation of their inventory and accounts receivable, as well as for the buyer in their accounts payable.

Example

To illustrate the above, let's use the following example. On December 30, vendor J sends a truckload of merchandise to customer K, which is located 2,000 kilometers away.

The truck loaded with goods arrives at customer K on January 4. Between December 30 and January 4, the truck full of merchandise is in transit. Goods in transit require special attention if companies issue financial statements as of December 31.

The reason for this is that the merchandise is part of the inventory of one of the two companies, even though it is not physically present in either of the two. One of the two companies must add the cost of the merchandise in transit to its inventory cost.

Importance of the term of the sale

The term of the sale will indicate which company must account for the goods in transit as part of its inventory as of December 31. If the term is FOB shipping point, where the buyer pays the freight costs, seller J will record the sale and account receivable in December, and will not include the merchandise in transit in its inventory.

As of December 31, customer K is the owner of the goods in transit. You will need to indicate the purchase, the payment and add the cost of the merchandise in transit to the cost of your inventory.

If the term of the sale is FOB destination, where the seller pays the freight costs, seller J will not have a sale and a receivable until January 4.

This means that seller J must report the cost of the merchandise in transit in his inventory as of December 31st. Customer K will not have a purchase, account payable, or inventory of these goods until January 4.

Shipping costs

The shipping costs incurred on purchases are known as transportation or freight costs.

If the terms of the purchase are FOB origin, this means that the buyer is responsible for paying freight costs, and the cost accounting principle requires that these transport costs be included as part of the inventory acquisition cost of the merchandise.

References

1. Harold Averkamp (2018). What are goods in transit? Accounting Coach Q&A. Taken from: accountingcoach.com
2. Steven Bragg (2013). Goods in transit. Accounting Tools. Accounting CPE Courses & Books. Taken from: accountingtools.com
3. WD Adkins (2018). The Taxation of Merchandise In Transit. Taken from: smallbusiness.chron.com
4. Accounting Scholar (2018). Transfer of Ownership, FOB Shipping & FOB Destination Points - Accounting for Transportation Costs of Merchandise Inventory. Chapter 6.3. Taken from: accountingscholar.com
5. Wikipedia, the free encyclopedia (2017). Goods in transit. Taken from: es.wikipedia.org