Goods in transit are goods that have left the seller's premises but have not yet reached the buyer at a particular point in time, usually the end of an accounting period. While they are on a truck, train, ship or plane, they are physically in neither party's warehouse, yet they must appear in one party's inventory. Which party includes them depends on who holds legal title, and that is determined by the shipping terms agreed in the sale contract.
The question matters most at the end of a reporting period. Goods in transit can represent a significant amount of inventory for businesses that ship long distances, such as importers whose goods may spend weeks at sea. Getting ownership wrong misstates inventory, cost of goods sold, revenue and profit for both the buyer and the seller.
Who owns goods in transit
In US domestic trade, the two most common terms are:
- FOB shipping point, under which title passes to the buyer when the seller hands the goods to the carrier, so the buyer owns goods in transit and includes them in its inventory.
- FOB destination, under which title stays with the seller until the goods arrive, so the seller owns goods in transit and keeps them in its inventory.
In international trade, the equivalent question is answered by the Incoterms rule in the contract, such as FCA, CIF or DAP, which sets the point at which risk transfers. Under ASC 606 and IFRS 15, the seller recognizes revenue when control passes to the customer, and transfer of title and risk are key indicators of that point. The bill of lading issued by the carrier is the main evidence of shipment and, for some shipments, of title itself.
Worked example
A wholesaler with a 31 December year end has $480,000 of goods in its warehouse according to its physical count. Two shipments are in transit at year end:
- A shipment of goods costing $35,000 that it bought from a supplier, shipped on 28 December under FOB shipping point terms and due to arrive on 4 January.
- A shipment of goods costing $22,000, with a sales price of $30,000, that it sold to a customer, shipped on 30 December under FOB destination terms and due to arrive on 3 January.
The first shipment belongs to the wholesaler, because title passed when it left the supplier, so the wholesaler adds $35,000 to inventory and records the related accounts payable. The second shipment also still belongs to the wholesaler, because title passes only on delivery, so it adds $22,000 to inventory and does not record the $30,000 sale or accounts receivable until January. Correct year-end inventory is therefore $480,000 plus $35,000 plus $22,000, which is $537,000.
Cut-off and audit procedures
Recording goods in transit in the right period is part of cut-off, one of the most tested areas in the year-end close and the audit. Common errors include omitting purchased goods that have not yet arrived, recording sales on shipment when terms are FOB destination, and double counting goods that appear in both a physical count and a purchase in transit. Auditors examine shipping and receiving documents, carrier records and invoices dated just before and after the period end, and they compare them with the inventory count and the sales and purchase journals.
Goods in transit should not be confused with consigned goods, which sit in a consignee's premises but still belong to the consignor, or with goods held in a public warehouse, which are evidenced by a warehouse receipt and owned by whoever holds title to them.
Risk and presentation
The owner of goods in transit also bears the risk of loss or damage during transport, so it should have suitable insurance or a clear claim against the carrier. Many companies present goods in transit within total inventories on the balance sheet, with any large amount noted separately. Businesses with long supply chains often track goods in transit as their own inventory location in their systems so that they are not forgotten at period end.