A Guide To Accounting For Goods In Transit

Accounting for Goods in transit is the first step in the process of tracking the flow of inventory. Accounting for inventory is a mandatory function to any business entity whose purpose not only demonstrates the effects of inventory on profitability and cash but also the assessable tax liability due to government. Accounting in the context of shareholders is usually done monthly, quarterly or annually, and relevant documents are generated and kept to report inventory activities over the same period.

Accounting for inventory for purposes of tax assessment goes beyond the day of filing your returns, because the law compels you to keep your inventory records for future verification by the tax authorities. Tax regulations in most countries require at least one physical inventory count per year; thus, these records should be stored in the event of a tax audit. If continuous cycle counting is used instead of a single physical inventory count, then these records must also be stored. The time period over which the law mandates you to retain your accounting documents differs under various legislations, but ranges between 5 and 7 years.

This page discusses record keeping from a context of Accounting for Goods in Transit

?Goods in Transit or GIT as it is commonly referred to is a Current asset ordinarily classified under the sub heading of Inventory items within the balance sheet. It represents commitments to pay or already paid for inventory which does not yet physically exist in the company stores.

From the simplistic side of record keeping, a company receiving inventory typically records it as soon as it arrives. This way both the inventory and liability accounts increase at the same time, thereby resulting in no net change in the statement of financial position and no impact on profit or loss. Consequently, this situation creates no particular need for recordkeeping.

Goods in Transit Accounting

Accounting for goods in transit is necessitated by a requirement for companies to declare commitments to which liability is due. In other words the company declares its interest in shipped goods for which title was only transferred at some point in the shipment process.

Shipping documents, such as a bill of lading, should be stored that indicate the date of shipment from the facility, as well as a notification form from the shipping entity that describes the date on which title passed to the buyer. The bill of lading can be used to estimate the date on which title passes by adding a standard number of days to the ship date, based on the distance of the buyer from the shipper?s facility; thus it is a critical document for affirming the timing of any revenue transactions.

Upon receipt of the goods, a verification of the goods received as per the bill of lading is done in comparison with the purchase order. A goods received note (listing items received) is then raised and signed by stores and procurement clerks to confirm material quantities received.

From a perspective of accounting for goods in transit, the company has to register in its books the amounts owed to the supplier as soon as liability or risk to the goods passes to the buyer. The timing is usually spelt out in the suppliers terms of payment to be confirmed by the company at the point of placing the order. Terms usually range from date of shipment to date of delivery.

Taking stock of liability to the goods in transit and risks there of

Taking title to goods in transit means that you have not only accepted to pay your supplier the agreed price of what you expect to receive subject to deductions for quality and other losses to be borne by them, but also possible losses arising in transit due to theft, fire and others to be borne by you. Hence in addition to the supplier?s cost, you need to pay for insurance as an upfront additional cost to the goods for un foreseen risks. Other incidental costs might include financing charges payable or charged by your banker in the event that you are paying through a bank loan.

The ledger entries required when accounting for goods in transit are as follows:

Dr: Goods in Transit A/c (create unique tracking code for each consignment)

Cr: 1. Supplier?s A/c, 2. Insurers A/c (premium payable), 3. Bank a/c (with interest charged)

Credit any or all of the three account options above depending on their relevance to the consignment. Also make reference to the consignment tracking code in your narration for the payments, you will need this information at a later stage when valuing your goods after they arrive at your company store.

Return from Accounting For Goods In Transit to Inventory Management.

View the original article here

Last in First Out (LIFO) Cost Flow for Cost of Goods Sold and Inventory

The LIFO FIFO inventory valuation methods are the most popular methods of assigning costs to inventory. LIFO inventory, or last in first out, assumes that the last goods purchased are the first goods used or sold.

The LIFO inventory valuation method is a common method for assigning inventory cost. The three other main inventory valuation methods are FIFO, average cost, and specific identification. FIFO, or first in first out, assumes that the first goods purchased are the first goods used or sold.

Companies can use cost flow assumptions regardless of the actual physical flow of inventory.

Inventory is recorded at historical cost, and then subject to an adjustment to the lower of cost or market (LCM).

But inventory items are purchased at different times during the year subject to different price fluctuations. Some companies, like Costco, Wal-Mart, and Home Depot, hold millions of inventory items at year-end. Imagine cases of ballpoint pens or nails coming into the retailer during the year at different times and subject to different price fluctuations.

For these companies with large inventories, tracing the original cost to every inventory item is neither cost-effective nor efficient, and one of the aims of GAAP is to present financial information only when the benefit of reporting that information exceeds the costs of obtaining it.

Though companies may track and measure each item internally for quality assurance and safety measures, it is not necessary to track the actual physical flow of inventory for financial reporting purposes.

Instead, cost flow assumptions are used to simplify inventory reporting and cost of goods sold. These cost flow assumptions, or inventory valuation methods, simplify cost of goods sold and inventory accounting by reducing information required to a few data points in the cost flow process, such as beginning inventory, purchases, and ending inventory. Items can then be identified based on a cost flow assumption, as opposed to tracking the actual cost of every inventory item that is quickly buried and obscured in the physical flow of inventory.

The four main inventory cost flow assumptions are LIFO, FIFO, Average Cost, and Specific Identification.

LIFO Inventory: Lower Taxes for Rising Prices

LIFO Inventory comes from the US Internal Revenue Code

The actual physical flow of inventory items which Sunny purchased over the past three months are as follows:

Actual Physical Flow of Inventory

Inventory Purchase two months ago:Inventory Purchase one month ago:

When Sunny sells twenty five pairs of sunglasses one sunny afternoon, it is unlikely that he knows which original order the pair of sunglasses came from. Unbeknownst to Sunny, the first twelve sunglasses came from Box 1 at $14 each, the next ten sold came from Box #2 at $15 each, and the last three pairs came from Box #3 at $16 each. If Sunny tracked every pair of sunglasses coming in, he would total his cost of goods sold based on the actual physical flow of inventory:

Sunglasses Purchased two months ago:Sunglasses Purchased one month ago:Sunglasses purchased this week:Sunglasses Purchased two months ago:Sunglasses Purchased one month ago:Sunglasses purchased this week:

Alternatively, Sunny can calculate cost of goods sold and ending inventory based on the cost flow assumption that the last goods ordered are the first ones sold. Since the last items ordered last week cost $16 a pair, and the amount sold was 25 pairs of sunglasses, all of the pairs sold are applied to cost of goods sold at $16 per pair, the last box ordered:

Sunglasses Purchased two months ago:Sunglasses Purchased one month ago:Sunglasses purchased this week:Total Inventory Cost of Goods Sold: $400

Similarly, ending inventory is based on the cost flow assumption that the last items in were sold, and the first items in are still here (FISH):

Sunglasses Purchased two months ago:Sunglasses Purchased one month ago:Sunglasses purchased this week:

Note that the specific identification method, LIFO and FIFO all result in total goods available for sale of $10,800, but LIFO assigns more to cost of goods sold and less to ending inventory during periods of rising prices, while FIFO assigns less to cost of goods sold and more to ending inventory during the same period.

LIFO Inventory Strengths: The LIFO inventory valuation method more accurately matches current costs (COGS) with revenue, thus providing the better measure of real gross profit during rising prices.During periods of rising prices, using the LIFO inventory valuation method results in a lower income tax liability when compared to other alternatives. (However, during deflationary periods, the opposite is true).

LIFO Inventory Weaknesses:

The LIFO inventory valuation method potentially misstates current inventory costs on the balance sheet when prices rise, since it assigns prices to inventory from earlier periods.Because the origins of the LIFO inventory method come from the Internal Revenue Code, LIFO is subject to more complex IRS regulations and requirements than other inventory valuation alternatives.