Goodsintransit, also called goods in transit, refers to cargo that has left a shipping dock, en route from a seller (consignor) to a buyer (consignee). It is important to distinguish goodsintransit as it determines the party that is responsible for certain
- shipment and customs charges and
- damage risks.
The labeling of goodsintransit also affects the way accounts and taxes are documented.
Ownership of Goods in Transit
Depending on the pre-agreed incoterms of a shipment, goodsintransit may be owned by either the consignor or the consignee. This is reflected on documents like the Bill of Lading and commercial invoice.
The relevant incoterms include FOB (Freight on Board) destination and FOB shipping point, specific to sea freight.
Importance of Distinguishing Ownership of Goods in Transit
It is important to distinguish ownership of goods for the following reasons:
- Taxes and accounts journal entry
The chosen incoterms (reflected on the commercial invoice) will affect the way the transaction is recorded in a balance sheet or profit and loss accounts journal entry.
For example, the sales transaction and inventory receipt dates may differ. This may affect the valuation and tax calculation of the goods for both parties.
- Damage liability
In the case where the goodsintransit get damaged, it is important to distinguish the party liable for any losses incurred.
FOB Destination
In FOB destination, the consignor owns and is responsible for goodsintransit. They are liable for any damages incurred. Ownership is only transferred once cargo reaches the consignee.
The sales transaction (for consignors) and inventory receipt dates (for consignees) reflected in the parties’ accounts journal entries will follow:
- The date the goods are received by the consignee
FOB Shipping Point
In FOB shipping point, the consignor is only liable for the merchandise until it leaves their shipping dock. Goodsintransit are thus owned by the consignee, making them liable for any damages incurred.
The sales transaction (for consignors) and inventory receipt dates (for consignees) reflected in the parties’ accounts journal entries will follow:
- The date the goods leave a consignor’s shipping dock
Example of Goods in Transit
For example, car manufacturer ABC in Nagoya, Japan is shipping 30 cars to dealership XYZ in Florida, USA. Once the cargo is ready, it is transported to the port of Nagoya (point S), and rolled onto RoRo ships.
When fully loaded, the ship leaves the dock, setting sail for Florida. The cars are now regarded as goodsintransit. Once they have arrived at the port of Jacksonville, they go through customs clearance and are then moved to XYZ’s dealership (point D).
Under FOB shipping point:
- A transaction is made at point S
- ABC owns and is liable for the cars until point S
- XYZ assumes ownership of the cars from point S
- XYZ assumes responsibility for the goodsintransit
Under FOB destination:
- A transaction is made at point D
- ABC owns and is liable for the cars until point D
- XYZ assumes ownership of the cars from point D
- ABC assumes responsibility for the goodsintransit
Valuation of Goods in Transit
Goodsintransit often incur inventory and transportation costs for each day in transit. This can be valuated by working out the following calculations:
- Average shipment value per day = (Cost of goods x carrying cost percentage) / 365
- Cost of transportation = Number of days in transit x average shipment value per day
- Cost of goodsintransit = Cost of merchandise + cost of transportation
The carrying cost of merchandise (including labor, warehousing and opportunity cost) is usually estimated to be around 20%. We multiply this by the cost of the merchandise (e.g. $40,000). We then divide this by 365 to get a daily average.
Average shipment value per day = ($40,000 x 20%) / 365 = $21.92 per day
We then multiply this by the number of days in transit to get the cost of transportation. For example, if this shipment takes 25 days to be transported, then:
Cost of transportation = $21.92 x 25 = $548
Thus, the overall cost of goodsintransit per shipment sums up to $40,548.
Importance of Goods in Transit Insurance
The right goodsintransit cargo insurance can help protect consignors and consignees from financial loss caused by:
- In-transit accidents
- Natural disasters
- Theft
- Accidental damage or loss
The terms of the sale often determines the party responsible for obtaining this insurance. When working with freight forwarders like M&P International Freights, they will usually secure goodsintransit insurance on behalf of their clients.