Accounting standards require a company to record inventory when the risks and rewards associated with the goods get transferred to it. Sometimes, the company may not be in physical possession of those goods. However, they may still need to record the inventory they have not yet received. In most cases, this inventory falls under goods in transit.
The accounting for goods in transit may be complex due to its nature. However, it can be more straightforward through understanding what these goods are.
What are Goods in Transit?
Goods in transit refer to items that have not reached the final destination yet. It includes products that a company has purchased but not yet received. Technically, these goods are in possession of the carrier, i.e., the shipping company. However, it has not reached the buyer or the final recipient. Goods in transit may also have insurance set out against them.
Goods in transit can be complex to understand due to their nature. In short, these goods are neither with a supplier nor the customer. Instead, they include items that have left the supplier's location but have not yet reached the customer. However, the risks and rewards associated with these goods have been transferred to the customer. It usually means that the supplier has passed the legal ownership to the customer.
What is the accounting for Goods in Transit?
Accounting standards require the company that owns goods in transit to consider them as inventory. Therefore, they are a part of the company's balance sheet as a current asset. The accounting for goods in transit involves making entries in the company's general ledger when the risks and rewards get transferred. Until these goods reach the company, they are a part of the “goods in transit” account.
The accounting process records the movement of the goods from the supplier to the customer. When the supplier sends the goods, the customer must record them as goods in transit transaction. However, the legal ownership of these goods must be passed to the customer to count as a transit item. Once these goods reach the customer, they can move the balance to the inventory account.
What is the journal entry for Goods in Transit?
The journal entry for goods in transit is straightforward. It requires ascertaining that the legal ownership of the items has passed to the customer. However, the goods must not be in their possession. The journal entry to record these goods in transit will be as below.
| Dr | Goods in transit |
| Cr | Bank or Cash or Accounts payable |
Once the customer receives the goods, they must transfer the amount to the inventory account. The journal entry to do so is as follows.
| Dr | Inventory |
| Cr | Goods in transit |
Example
A company, Red Co., purchases $10,000 worth of inventory from an overseas supplier on credit. The supplier transfers the legal ownership of the goods to Red Co. However, the goods take 10 days to reach the company. At the time, Red Co. records the transaction as follows.
| Dr | Goods in transit | $10,000 |
| Cr | Accounts payable | $10,000 |
After 10 days, Red Co. receives the goods. The company transfers the amount from goods in transit to inventory as follows.
| Dr | Inventory | $10,000 |
| Cr | Goods in transit | $10,000 |
Conclusion
Goods in transit refer to inventory a company receives the risks and rewards from but not the physical possession. Usually, it includes products a supplier has shipped but has not reached the customer. The accounting for goods in transit may be complex due to the underlying concept. However, the journal entries are straightforward.
Originally Published Here: Goods in Transit: Definition, Accounting Treatment, Journal Entry, Example
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