Why Accounting For Goods In Transit Cant be Avoided

Accounting for Goods in transit is the first step in the process of tracking the flow of

inventory. Accounting for inventory is a mandatory function to any business entity whose purpose not only demonstrates the effects of inventory on profitability and cash but also the assessable tax liability due to government. Accounting in the context of shareholders is usually done monthly, quarterly or annually, and relevant documents are generated and kept to report inventory activities over the same period.

Accounting for inventory for purposes of tax assessment goes beyond the day of filing your returns, because the law compels you to keep your inventory records for future verification by the tax authorities. Tax regulations in most countries require at least one physical inventory count per year; thus, these records should be stored in the event of a tax audit. If continuous cycle counting is used instead of a single physical inventory count, then these records must also be stored. The time period over which the law mandates you to retain your accounting documents differs under various legislation, but ranges between 5 and 7 years.

This page discusses record keeping from a context of Accounting for Goods in Transit

Goods in Transit or GIT as it is commonly referred to is a Current asset ordinarily classified under the sub heading of Inventory items within the balance sheet. It represents commitments to pay or already paid for inventory which does not yet physically exist in the company stores.

From the simplistic side of record keeping, a company receiving inventory typically records it as soon as it arrives. This way both the inventory and liability accounts increase at the same time, thereby resulting in no net change in the statement of financial position and no impact on profit or loss. Consequently, this situation creates no particular need for recordkeeping.

Goods in Transit Accounting

Accounting for goods in transit is necessitated by a requirement for companies to declare commitments to which liability is due. In other words the company declares its interest in shipped goods for which title was only transferred at some point in the shipment process.

Shipping documents, such as a bill of lading, should be stored that indicate the date of shipment from the facility, as well as a notification form from the shipping entity that describes the date on which title passed to the buyer. The bill of lading can be used to estimate the date on which title passes by adding a standard number of days to the ship date, based on the distance of the buyer from the shipper’s facility; thus it is a critical document for affirming the timing of any revenue transactions.

Upon receipt of the goods, a verification of the goods received as per the bill of lading is done in comparison with the purchase order. A goods received note (listing items received) is then raised and signed by stores and procurement clerks to confirm material quantities received.

From a perspective of accounting for goods in transit, the company has to register in its books the amounts owed to the supplier as soon as liability or risk to the goods passes to the buyer. The timing is usually spelt out in the suppliers terms of payment to be confirmed by the company at the point of placing the order. Terms usually range from date of shipment to date of delivery.

Taking stock of liability to the goods in transit and risks there of

Taking title to goods in transit means that you have not only accepted to pay your supplier the agreed price of what you expect to receive subject to deductions for quality and other losses to be borne by them, but also possible losses arising in transit due to theft, fire and others to be borne by you. Hence in addition to the supplier’s cost, you need to pay for insurance as an upfront additional cost to the goods for un foreseen risks. Other incidental costs might include financing charges payable or charged by your banker in the event that you are paying through a bank loan.

The ledger entries required when accounting for goods in transit are as follows:

Dr: Goods in Transit A/c (create unique tracking code for each consignment)

Cr: 1. Supplier’s A/c, 2. Insurers A/c (premium payable), 3. Bank a/c (with interest charged)

Credit any or all of the three account options above depending on their relevance to the consignment. Also make reference to the consignment tracking code in your narration for the payments, you will need this information at a later stage when valuing your goods after they arrive at your company store.

Return from Accounting For Goods In Transit to Inventory Management.