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Items in Transit - Are They Considered Inventory?

As with many accounting questions the answer is, “that depends…” Here’s the scoop.

Accounting transactions attempt to mirror actual and legal activities. In most cases in an accrual or modified cash basis of accounting, when you pay for your products if you are responsible for the shipping costs, the goods are considered your property and therefore they are your inventory. The value of the goods should be added to your financial books at the time of payment. Your shipping paperwork will note terms such as “FOB shipping point”. FOB stands for "Free on Board” and shipping point means ownership or title passes when the freight carrier takes possession. These goods are owned by you while in transit.

There are a few other considerations. In the event that your supplier ships the product FOB destination, then the supplier is maintaining possession and risk of loss until the goods are accepted by you or your agent at the arrival point. This arrival point may be your location or it may be a prep center or other agent acting on your behalf. You would account for the inventory on your books at this time.

What if you have possession of the goods but have terms with your supplier and will not pay for them for 30 days or 90 days? In this case, you have taken possession. While you have an obligation to repay the “loan” to your supplier; this is financial transaction does not relate to possession of the goods. You are the owner of the inventory. 

Inventory, shipping and financing arrangements can vary widely. Check in with your accounting professional if you have any questions.