Goods in Transit Accounting: Journal Entries, Incoterms and Month-End Cut-Off

An importer closes September with a container still at sea. The supplier's invoice is in accounts payable, the freight forwarder has billed the ocean freight, and the warehouse has received nothing. Is the container inventory on 30 September, or does it wait for the goods receipt in October? The answer depends on the delivery terms, not on where the container is. Getting it wrong moves a whole purchase into the wrong month and leaves inventory and payables out of step at the close.

What are goods in transit?

Goods in transit are goods that the seller has shipped and the buyer has not yet received. They belong in the inventory of the party that controls them during the journey, so they can be on the buyer's balance sheet long before they reach the warehouse. They are also called inventory in transit or stock in transit.

Goods in transit are the mirror image of GRNI (goods received not invoiced). GRNI is stock you have received and not yet been billed for. Goods in transit are stock you already control and have not yet received, and very often the invoice is already in. A container from China to a port on the Adriatic or in Greece spends four to five weeks at sea when the ship goes through Suez and six to eight weeks when it goes around the Cape of Good Hope, so an importer has some purchases in the middle of the journey at every month end.

Who owns goods in transit? Control, not location

Three different things travel with a shipment, and they do not always change hands at the same moment:

• Risk of loss. Who carries the loss if the container is damaged or lost. The Incoterms rule in the contract decides this.
• Costs. Who pays the freight, the insurance and the duty. The Incoterms rule decides this too, and the point where costs pass can differ from the point where risk passes.
• Title. Who legally owns the goods. The sales contract and the law that governs it decide this. Incoterms rules say nothing about title.

For the books, the question is control. Can the buyer direct what happens to the goods and get their benefit? In practice the buyer tests it with five indicators:

1. The buyer has a present obligation to pay for the goods.
2. The buyer has legal title, or the seller keeps title only as security until it is paid.
3. The buyer has physical possession, directly or through a carrier that holds the goods for it.
4. The buyer carries the significant risks and rewards of the goods, usually from the Incoterm risk point.
5. The buyer has accepted the goods, or acceptance is a formality.

No single indicator decides. In most contracts they point the same way, and the risk point of the Incoterm is the strongest practical signal. A retention of title clause that exists only to protect the seller against non-payment does not stop control from passing. The buyer and the seller each judge control on their own contract and facts, and they usually reach the same answer.

Incoterms 2020 and goods in transit

Incoterms 2020 has eleven rules. Each one names the point where risk passes from the seller to the buyer and who pays which costs. The last column of the table is the usual result of the control test for goods at sea on the period-end date. It is a starting point for each contract, not a rule.

“(sea)” marks the rules meant for sea or inland waterway transport only. Under FCA at the seller's own premises, risk passes once the goods are loaded on the buyer's vehicle. Under CPT and CIP the parties can agree a later point than the first carrier. Only two rules oblige the seller to insure the goods: CIF with minimum cover and CIP with all-risks cover. Two warnings belong next to this table:

• Incoterms rules do not deal with title. Title comes from the contract and the governing law. That is why the last column is the usual outcome of the control test and not a legal answer.
• “The seller pays the freight” does not mean “the seller owns the goods at sea”. Under CFR and CIF the seller pays for the voyage, but the risk is already the buyer's once the goods are on board. Goods at sea are then usually the buyer's inventory. For containers handed over at a terminal, the Incoterms rules themselves recommend FCA instead of FAS or FOB, CPT instead of CFR and CIP instead of CIF.

What goes into the cost

The Incoterm decides when the goods appear on your balance sheet. What they cost depends on the price you agree and the charges you pay to bring them to your warehouse. Inventory cost includes the purchase price, the freight, the cargo insurance, the import duty and the handling to the first warehouse. Import VAT that you can recover is not part of the cost. It is a receivable from the tax authority.

When one container holds several items, the freight and duty have to be spread across them. That allocation is the subject of the landed cost guide. This post uses a single item, so the whole cost lands on one product.

Goods in transit example: one container, two Incoterms

A distributor in Belgrade buys 2,000 LED panels at €18.00 from Orvana Lighting, a fictional supplier in Ningbo. The goods are worth €36,000. The period end is 30 September. The amounts are shown in euros for readability. A Serbian company books in dinars and revalues the euro payables at the closing rate on 30 September.

The same container travels in both scenarios:

• 7 September: Orvana hands the container to the carrier at the Ningbo container terminal, and it is loaded on board the same day.
• 9 September: the shipping documents arrive by email.
• 30 September: month end. The container is at sea.
• 12 October: import declaration and customs clearance in Serbia.
• 14 October: the goods arrive at the Belgrade warehouse and are counted.

Scenario A, FCA Ningbo container terminal. Orvana delivers when it hands the container to the carrier the buyer nominated, so risk passes on 7 September. The buyer pays freight to the Serbian border of €2,400, cargo insurance of €100 and €300 for the leg from the border to the warehouse. The customs value is €38,500 (goods, freight and insurance to the border). Duty at an illustrative 4% is €1,540. Import VAT at 20% is charged on €40,340 (customs value, duty and the €300 leg to the warehouse) and comes to €8,068. The €300 is outside the customs value but inside the VAT base, because the warehouse is the first destination named on the transport document. The import VAT is recoverable, so it stays out of inventory.

Scenario B, DAP Belgrade warehouse. Orvana carries the goods to the warehouse, so risk passes on 14 October. To keep the comparison clean, Orvana passes freight, insurance and delivery through at cost and invoices €38,800 on delivery. Under DAP the buyer still clears the goods for import. Orvana's invoice shows the €300 delivery after the border separately, so the customs value stays €38,500 and the buyer pays the same €1,540 of duty and €8,068 of import VAT.

Same container, same cost per panel, two different balance sheets. If the buyer in Scenario A books nothing until the goods receipt, including the three invoices, September inventory and payables are both understated by €38,500 and the purchase lands in October. If the invoices are booked when they arrive but the stock waits for the goods receipt, payables are right and inventory is still €38,500 short, with the debit parked in a clearing or expense account.

Goods in transit journal entries

In Scenario A each document gets one entry, and goods in transit is a balance sheet account inside inventory:

The unit cost on receipt is €40,340 ÷ 2,000 = €20.17. Control triggers the entry, and the invoice only documents it. Here control passed on 7 September and the documents arrived on 9 September, both in September, so the balance sheet on 30 September is the same either way. If the documents had arrived after 30 September, the buyer would book Dr Goods in transit / Cr Accrued payables on 30 September from the bill of lading. For an invoice in a foreign currency, the goods are recorded at the rate of the day control passed.

In Scenario B nothing is booked in September, because the goods are still Orvana's. On 12 October the buyer books the duty to a customs duty clearing account (Dr Customs duty clearing €1,540 / Cr Customs duty payable €1,540) and the import VAT as in Scenario A. On 14 October the goods receipt posts Dr Inventory €38,800 / Cr GRNI €38,800, Orvana's invoice clears GRNI, and Dr Inventory €1,540 / Cr Customs duty clearing €1,540 moves the duty into stock. The cost is again €40,340, or €20.17 per panel. If a month end falls between the import declaration and the delivery, the duty clearing balance is a prepaid purchase cost in other current assets, not inventory, because the goods still belong to Orvana.

The goods receipt itself is the same as in any purchase. The goods receipt accounting guide covers it, and the inventory journal entries guide follows the stock from receipt to cost of goods sold.

What the seller records

The seller looks at the same handover from the other side. Under FCA, Orvana removes the panels from its inventory and recognizes the sale on 7 September, provided the other control indicators agree. Under DAP it keeps the container in its own inventory until 14 October, and the panels are still Orvana's goods in transit on 30 September.

A seller that habitually replaces goods lost in transit does not automatically keep control until delivery. The habit alone does not decide it. If control passes at shipment, the seller checks whether that transit cover is a separate promise to the customer, and only the part of the price that belongs to that promise waits for delivery.

Goods in transit at month end: cut-off checklist

1. List the open shipments. Supplier, transport document date, Incoterm, title clause and expected arrival for every purchase that has shipped and not been received.
2. Decide control for each one at the period end. Use the Incoterm risk point and the contract, not the arrival date.
3. Book goods in transit for the shipments you control. Where the supplier invoice has not arrived, accrue it from the bill of lading or the shipping notice.
4. Accrue freight and insurance already incurred. Do not accrue duty before the import declaration.
5. Reconcile the goods in transit account to the open-shipment list. Every euro in the account should point to a shipment.
6. Age the balance. Chase anything older than the normal voyage time for its route.
7. After the period end, check receipts against the list. Every receipt of a shipment you booked as in transit should clear its balance, and no shipment should be booked twice.

Auditors test cut-off on documents around the period end. For goods at sea they also trace receipts in the weeks after the period end back to transport documents dated before it, so the review window follows the voyage time, not a fixed few days. A goods in transit balance that cannot be tied to a list of shipments is one of the reasons warehouse and accounting records disagree.

Stock in transit between your own warehouses

A transfer from your warehouse in Belgrade to a branch in Novi Sad is also stock in transit, but nothing changes owner. The value never leaves inventory. What changes is where the stock is and whether anyone can sell it. A transfer in two steps handles this: the shipment from the first warehouse moves the quantity to an in-transit location, and the receipt at the second warehouse moves it into available stock. While the goods travel, they should not count as available to sell in either place.

Reconcile transfers that have shipped and not been received the same way as supplier shipments. A transfer that sits in transit for weeks is usually a receipt nobody posted, and it shows up as a difference in the inventory reconciliation.

Common goods in transit mistakes

1. Both parties book the goods, or neither does. The buyer waits for the receipt and the seller has already recorded the sale, so the container disappears from both balance sheets.
2. “We paid the freight, so the goods are ours.” Paying freight is a cost term. Under CFR and CIF the seller pays the freight and the buyer still carries the risk at sea.
3. A goods in transit balance with no shipment behind it. Usually a receipt that was posted to inventory without clearing goods in transit, so the same goods are counted twice.
4. Damage in transit booked on the wrong side. The party that carries the risk at the moment of the loss writes it off when it happens. An insurance claim becomes a receivable only when recovery is virtually certain, usually once the insurer accepts it. Until then it is at most a note to the accounts.
5. Revaluing the goods with the payable. The euro payable to Orvana is revalued at the closing rate on 30 September. The €36,000 of goods stays at the rate of 7 September, the day control passed. The freight and insurance keep the rates of the days they were booked. If part of the price was paid as a deposit before shipment, that part of the goods keeps the rate of the day the deposit was paid.
6. Treating an invoice as proof of control. An invoice alone does not create goods in transit. If you pay for goods you do not control yet, the payment is a prepayment to the supplier, not inventory.

When the supplier invoice arrives weeks before the goods, the three-way match has no receipt to match yet. The invoice should wait for the receipt or be matched to the shipment, not be forced through with a manual override.

How Gruvero approaches goods in transit

Gruvero posts the goods receipt to inventory and GRNI, and an invoice matched to that receipt clears GRNI against accounts payable. A supplier invoice for stock can be entered only against a posted goods receipt, so when the invoice arrives before the goods, it waits for the receipt. Stock moves between warehouses with one transfer document that posts in a single step, so the quantity leaves one location and arrives at the other at the same moment, with no in-transit stage. For FIFO-valued items the cost layers move with the goods. Recognizing goods in transit before the goods receipt, by Incoterm or otherwise, is not supported yet. The procurement ERP page describes the receipt and invoice flow that exists today.

FAQ

Are goods in transit included in inventory?

Yes, in the inventory of the party that controls them on the reporting date. In the example the buyer includes €38,500 of goods in transit in its inventory on 30 September under FCA, and nothing under DAP, where the container is still in Orvana's inventory.

What is the journal entry for goods in transit?

When the buyer controls goods that are still on the way: Dr Goods in transit, Cr Accounts payable (or Cr Accrued payables if the invoice has not arrived). When the goods are received: Dr Inventory, Cr Goods in transit. In the example the receipt moves €40,340 from goods in transit to inventory.

Is goods in transit an asset or a liability?

It is an asset. Goods in transit are part of inventory, usually shown within inventory on the balance sheet or in a note to it. The related liability is the payable to the supplier and the carriers.

What is the difference between FOB shipping point and FOB destination?

These are US contract terms. Under FOB shipping point the buyer takes the goods, and the risk, when they leave the seller, so goods at sea are the buyer's. Under FOB destination they stay with the seller until they arrive. Incoterms FOB is a different, narrower rule: risk passes when the goods are on board a vessel, and it is meant for sea and inland waterway transport only.

Who records goods in transit under CIF?

Usually the buyer. Under CIF the seller pays the freight and the insurance, but the risk passes to the buyer once the goods are on board at the port of shipment. Goods at sea on the period-end date are therefore normally the buyer's inventory.

What is the difference between goods in transit and GRNI?

GRNI is goods received and not yet invoiced. Goods in transit are goods you control and have not yet received, often already invoiced. An invoice alone does not make goods in transit, and a payment for goods you do not control yet is a prepayment.

Can freight be capitalized while the goods are still at sea?

Yes, if the goods are already yours. The €2,400 of freight and €100 of insurance in Scenario A go into goods in transit in September and become part of the €20.17 unit cost on receipt. If the goods are not yours yet, freight you pay in advance is a prepaid cost until control passes.

Where do goods in transit appear on the balance sheet?

Within inventory, as a current asset. Some companies show the in-transit part on its own line or in the inventory note, which helps when the amount is large at the period end.

Conclusion

Goods in transit belong to whoever controls them, and the Incoterm in the contract is usually what decides it. Under FCA the Belgrade distributor carries €38,500 of goods in transit on 30 September for a container that arrives on 14 October. Under DAP it carries nothing for the same container. The cost per panel is €20.17 either way. Book goods in transit when control passes, keep a list of open shipments that the account reconciles to, and clear the balance with the goods receipt.