Goods in transit should be included in the inventory of the buyer when the

It’s easy to account for inventory that’s been purchased and received, but what about inventory that’s still in transit?

For a holistic picture of how much inventory you have in each phase of the supply chain, you don’t want to forget to account for in-transit inventory that’s been purchased.

This article explores the topic of goods in transit and how you can account for it within your overall inventory accounting process.

Let’s dive in.

What are goods in transit?

Also known as “pipeline inventory,” goods in transit refers to the amount of finished goods ordered from a supplier or manufacturer that is currently in transit and has yet to reach a physical store or distribution center.

Goods in transit refers to purchased inventory that is currently on its way to a physical store, an ecommerce warehouse, or a distribution center. Goods in transit should be accounted for similarly to what’s already on hand to provide a holistic picture of current inventory value. 

Accounting for goods in transit

Managing an ecommerce business requires proper inventory valuation. This includes having full inventory visibility of all finished goods purchased — whether its inventory on hand or goods currently in the first-mile delivery phase.

Most ecommerce brands will always have goods in transit to consistently meet demand. As part of the inventory replenishment process, brands will look at inventory performance, production lead lines, transportation timelines, and warehouse receiving times to order inventory according to a specific timeline, so it’s more likely to arrive, be accounted for, and be ready for fulfillment when needed.

But to know how much it costs to ship new inventory and have it stored, you will need to determine the average shipment value. You will need to know this at the end of an accounting period or fiscal year when it’s time to report ending inventory value.

In terms of ownership of in-transit inventory, certain rules might apply. It’s important to determine whether the goods are shipped under FOB (freight on board) destination or an FOB shipping point (more on this later). 

How to calculate goods in transit

To determine the cost of goods in transit per year, you will first need to calculate the average shipment value. Since it costs money to ship and store new inventory, you will first need to know the average cost of transportation, as well as your carrying cost. 

Let’s say the average inventory shipment is valued at $20,000 and takes approximately 20 days to reach its destination. Assuming the cost to store each shipment is about 20% of the merchandise cost, we can figure out the average shipment value per day using the following formula:

Merchandise Cost x Carrying Cost Percentage / 365 = Average Shipment Value Per Day

$20,000 x .20% / 365 = $10.95 per day

From here, we can calculate the average cost of transportation per shipment:

Average Shipment Value Per Day x Number of Days of Transit = Cost of Transportation

$10.95 x 20 = $219

So the overall cost of goods in transit would be $20,219 per shipment.

Who owns goods in transit?

Ownership of goods in transit depends on the terms of sale. In the case of FOB destination, the seller is the owner of the goods in transit and is, therefore, liable for the shipment. But under FOB selling point, the buyer is the owner of the in-transit inventory, making them liable for the shipment.

Here is a breakdown: 

• Under FOB destination, the sale takes place only after the goods reach the buyer’s destination and therefore, the title is still with the seller. That means ownership of the goods in transit still remains with the seller. Until the goods arrive at their destination, a sale or a purchase is not recorded.
• Under FOB shipping point, the sale takes place when the goods reach the shipping point and therefore, the title passes to the buyer before the goods are shipped out. That means the buyer now gets ownership of the goods in transit. The seller can record this as a sale, while the buyer records it as a purchase and accounts for the goods in its ending inventory value,

Is in-transit insurance a good idea?

Even if it’s on the buyer’s books, if any issues arise during transit (slowdowns, shipping damages, or misplacement of goods), you need to have a strong contingency plan in place. Having shipping insurance for inventory deliveries can help you reduce risk, so you don’t suffer heavy losses. 

With the right in-transit insurance, you can typically get coverage for loss or damage resulting from:

• Natural disasters
• Theft
• In-transit accidents
• Sinking (in case of shipment by sea)
• Derailing (in case of shipment by train)
• Accidental damages

Depending on the terms of sale, either the buyer or the seller can be responsible for goods in transit.

When goods in transit are included in the inventory this must be shipped under?

Are goods in transit included in a purchasers inventory?

Who owns the inventory when it is in transit?

When goods are considered in transit?