Goods in transit

What it means

Goods in transit are goods or materials the company has already acquired, meaning ownership has passed to it and it has usually received the invoice, but has not yet physically taken into stock. Typically this is a consignment on its way from the supplier, especially when importing.

Under inventory accounting method A, such inventory is kept on separate accounts, for example 119 for materials and 139 for goods in transit. Once received and a goods received note issued, it is transferred to the stock account.

When ownership passes is determined by the contract and delivery terms, such as Incoterms. Under some terms the goods belong to the buyer from dispatch, under others only on delivery, which affects whose balance sheet they belong on.

How it works in practice

At month end and especially at the annual stock-take we check invoices for goods that have not yet arrived. If ownership has already passed to the client, we record them as goods in transit so that inventory and liabilities on the balance sheet reflect reality.

For imports we also track the costs that belong to the goods, such as freight, duty and insurance. They form part of the acquisition cost and move to the stock account together with the goods. Under method B, where inventory is expensed directly, goods in transit are dealt with only at the stock-take.

Goods in transit that are not received for a long time signal a problem: a lost consignment, goods held at customs or a posting error. We therefore regularly break the balance down by consignment and check its status with the supplier or carrier.

What to watch out for

If goods in transit are not recorded at the year end, the company shows lower inventory and a liability with no counterpart, or vice versa. The error distorts profit and the ratios banks follow, such as inventory turnover.

Damage to or loss of goods in transit is dealt with according to who bears the risk at that point. Without clearly agreed delivery terms, disputes arise over who bears the loss and who should claim from the carrier or insurer.