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Goods in transit are those underway from a seller to a buyer, but aren’t physically held in the inventory of either party. Some important liability and accounting concerns surround transit inventory, as it is also known. The terms of the sale should discuss these issues to make sure the goods are adequately protected and all participants in the transaction understand their rights and obligations. If a problem like a delay, loss, or theft occurs while the products are underway, both parties need to be prepared to address it.
From an accounting standpoint, goods in transit can create a problem because the specifics of their ownership may be hazy. Sometimes this is not a problem; if the goods are shipped on the 10th and arrive on the 15th, when they arrive, the buyer records them as an asset in inventory. It can become an issue if shipments move over a time period when an accounting period is closing. Classically, this involves products that may be underway between the end of one year and the start of the next.
The seller may not want to declare goods in transit as an asset because it will be necessary to pay tax on them. Buyers share this sentiment, as they don’t want to say they own products that haven’t arrived yet, and take on the tax liability. Within the bill of sale, the parties should discuss who, for tax purposes, owns the products so they can be declared properly on accounting statements. In these declarations, the accountant notes that they are goods in transit so they are classified correctly with other assets.
Liability can also be an issue. If something happens to the goods, the buyer may argue the seller is responsible, while the seller may counter that the buyer now owns the goods and is responsible for them. In the terms of sale, the parties can discuss when liability transitions. One may choose to retain goods in transit insurance to provide coverage for losses, ensuring that if the products are lost, damaged, or stolen, they can be replaced without creating a financial burden for the buyer or seller.
Terms of transactions can vary considerably. Some sellers may take full responsibility for products all the way to the buyer’s door. Others deliver to a freight depot, shipyard, or similar locale and expect the shipper to take responsibility for the goods in transit, or inform the buyer that any insurance or liability coverage should take effect at that point.
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