Accounting for inventory in transit turns on one question: who legally owns the goods while they are moving? Under the shipping terms written into the purchase contract, either the buyer takes ownership when the goods leave the seller’s dock (FOB Shipping Point) or the seller keeps ownership until the goods arrive at the buyer’s location (FOB Destination). Whoever holds title records the inventory on their balance sheet, and every journal entry, freight classification, and year-end cutoff decision follows from that.
What FOB Terms Actually Control
The Uniform Commercial Code defines “free on board” as a delivery term that fixes when the seller’s obligations end and the buyer’s begin. Under UCC Section 2-319, FOB at the place of shipment means the seller bears expense and risk only until the goods reach the carrier; FOB at the place of destination means the seller bears expense and risk all the way to the buyer’s location.1Legal Information Institute. UCC 2-319 FOB and FAS Terms
Two very different accounting scenarios follow:
- FOB Shipping Point: ownership and risk transfer the moment goods leave the seller’s dock. The buyer owns the in-transit inventory even though it has not arrived.
- FOB Destination: the seller keeps ownership and risk throughout the shipping process. The buyer owns nothing until the goods physically arrive.
Record inventory you don’t legally own and you overstate assets. Fail to record inventory you do own and you understate them. Both errors flow into cost of goods sold and working capital ratios.
Buyer’s Entries
Under FOB Shipping Point
Record the purchase the moment the seller hands the goods to the carrier. Debit inventory and credit accounts payable (or cash) for the purchase price. Inventory goes up immediately, even if the truck is halfway across the country.
Freight the buyer pays on these shipments is capitalized into inventory rather than expensed. Inventory cost includes everything spent to bring goods to their current condition and location, so $5,000 of product plus $300 of shipping lands in inventory as $5,300.
Under FOB Destination
Make no entry until the goods arrive. The seller still owns the inventory during transit, and recording it earlier would inflate assets. The seller also typically pays the freight, so there are no shipping costs for the buyer to capitalize. The books stay untouched until physical delivery.
Seller’s Entries
Under FOB Shipping Point
The moment goods leave the facility, a sale has occurred. Two entries work together. Debit accounts receivable and credit sales revenue for the selling price. Debit cost of goods sold and credit inventory for the original cost. Both entries happen at shipment, not delivery.
If the seller agrees to pay shipping anyway, that cost goes on the income statement as freight-out, a selling expense. It is never added back to inventory because the goods already belong to the buyer.
Under FOB Destination
The goods remain the seller’s until they arrive. No sale entry, no removal of inventory, until delivery is confirmed. The inventory sits on the seller’s balance sheet the entire time it is moving. Once the buyer accepts delivery, the seller records revenue and cost of goods sold with the same two entries described above.
Shipping paid by the seller under FOB Destination is a selling expense recognized when the delivery is complete, whether the shipment moves on the seller’s own fleet or with a third-party carrier.
Where Freight Costs Land
Freight sits in different accounts depending on who pays and what the terms say:
- Freight-in, buyer pays under FOB Shipping Point: capitalized into inventory. It becomes part of the asset’s cost and flows through COGS when the item is sold.
- Freight-out, seller pays under either FOB term: expensed as a selling cost in the period incurred. Never added to inventory.
- Freight paid by the seller under FOB Destination: same treatment as freight-out.
The underlying logic: costs to bring inventory to its existing condition and location are part of the asset’s cost; costs to deliver inventory to a customer are selling expenses.
Year-End Cutoff
This is where in-transit inventory causes the most trouble. At period end, count inventory you legally own and exclude everything else, regardless of where the goods physically sit.
The practical work is reviewing shipping and receiving documents from the days surrounding the period end. Match accounts payable invoices to receiving reports, and match sales invoices to shipping documents. Verify that every purchase was recorded in the period the buyer took legal ownership and every sale was recorded in the period the seller shipped or delivered.
The most common error is missing goods still on a truck at midnight on the last day of the period. Goods bought FOB Shipping Point that shipped December 30 but won’t arrive until January 3 belong on the buyer’s December 31 balance sheet. If receiving hasn’t processed them, inventory is understated. The reverse: goods sold FOB Destination that haven’t arrived yet are still the seller’s and should remain on the seller’s books.
Skipping this analysis routinely misstates both inventory and COGS. Auditors look for exactly these errors, and they are among the most common audit adjustments at businesses with meaningful shipping activity.
When Goods Are Damaged or Lost in Transit
The FOB designation also controls who absorbs the loss. Under FOB Shipping Point, the buyer bears the risk from the moment goods leave the seller’s dock. Under FOB Destination, that risk stays with the seller until delivery is complete.1Legal Information Institute. UCC 2-319 FOB and FAS Terms
The accounting follows. A buyer under FOB Shipping Point has already recorded the inventory, so a destroyed shipment means writing off the loss (or recording an insurance receivable if cargo coverage applies). A seller under FOB Destination still holds the inventory as an asset and absorbs the loss when the shipment is destroyed.
Cargo insurance exists to cover these scenarios, and the party bearing the risk of loss is the one who should carry coverage. Annual transit policies suit companies that ship regularly; single-trip policies suit occasional shipments. Insurance does not change who bears the risk under the contract; it shifts the financial burden to the insurer after the fact.
Revenue Recognition Alignment
Sellers should also check that shipping terms align with revenue recognition. Under ASC 606, revenue is recognized when control of a promised good transfers to the customer, with indicators including legal title, shifted risk and rewards, and the seller’s present right to payment.2FASB. Revenue from Contracts with Customers Topic 606
For most FOB Shipping Point transactions those indicators line up at shipment, so recognizing revenue then is generally appropriate. For FOB Destination, control doesn’t transfer until delivery, and revenue recognition gets pushed back accordingly.
A wrinkle: when a seller continues to provide shipping services after transferring legal title, that service may be a separate performance obligation with its own revenue allocation. Many companies elect to treat shipping as a fulfillment cost instead, but the choice requires documentation and consistent application.
Consignment Is a Different Situation
Consigned goods look similar at first glance but are not inventory in transit. They sit physically at a retailer or distributor but remain owned by the supplier (the consignor). The consignee doesn’t record the goods as its own inventory, and the consignor doesn’t recognize revenue until the consignee sells to an end customer.
If you hold consignment inventory from a supplier, leave it off your balance sheet. If you’ve placed goods on consignment with a retailer, keep them on yours. Treating consignment like a standard purchase is an easy way to double-count or entirely omit inventory.