How to Account for In-Transit Inventory

Businesses keep inventory on hand for resale or for making other products. In-transit inventory refers to items that have been shipped but have not yet arrived at the destination. The accounting for in-transit inventory depends to some extent on the shipment terms. If an item is shipped with the terms "FOB shipping point," where FOB stands for "free on board," the buyer pays the shipping fees and takes ownership at the seller's warehouse. If an item is shipped "FOB destination," the seller pays the shipping fees and the buyer takes ownership when the item reaches his warehouse.

Record a sales transaction on the seller's books. If it is a cash sale, debit or increase cash and credit or increase sales. If it is a credit sale, which means the customer will make payment later, then debit or increase accounts receivable and credit sales. For example, if you sell $1,000 worth of products on credit, debit accounts receivable and credit sales by $1,000 each.

Cash and accounts receivable are balance sheet asset accounts. Sales is an income statement account. The balance sheet of a company contains a summary of its assets, liabilities and shareholders' equity, while the income statement summarizes sales, expenses and profits.

Adjust the inventory and cost of goods accounts for the seller. Inventory is a balance sheet asset account and cost of goods sold is an income statement account. Continuing the example, if the cost of goods for the items sold is $750, debit cost of goods sold and credit inventory by $750 each.

Account for shipping costs. The shipping fees are recorded on the buyer's books for FOB shipping point and on the seller's books for FOB destination. For example, if the terms are FOB destination and the shipping fees are $100, debit the delivery expense account and credit cash for $100 each. If the purchase is on credit, credit accounts payable instead of cash. Delivery expense is an income statement account and accounts payable is a balance sheet account.

Record the purchase transaction for the buyer. In a perpetual inventory system where the inventory account is updated continuously, debit inventory and credit cash; if it is a credit purchase, debit accounts payable.