When Are Goods in Transit Included in a Purchaser's Inventory?
Goods in transit are included in the purchaser's inventory when they are shipped FOB shipping point, because ownership (title) transfers to the buyer the moment the goods leave the seller. Under FOB destination, the goods remain the seller's inventory until delivered.
The answer
Goods in transit belong in the purchaser's inventory when the terms are FOB shipping point. "FOB" means "free on board," and the point named after it is where legal title — ownership — passes from seller to buyer. Under FOB shipping point, title transfers as soon as the goods leave the seller's shipping dock and are handed to the carrier. From that instant, the goods are the buyer's property, so the buyer counts them in inventory even while they are still on a truck, ship, or plane and have not yet arrived.
The mirror situation is FOB destination, where title does not transfer until the goods reach the buyer's location. Under those terms, goods still in transit remain the seller's inventory, and the buyer records nothing until delivery.
Why this matters for the balance sheet
Inventory ownership is not about who is physically holding the goods — it is about who holds legal title. This distinction is critical at the end of an accounting period. If a company buys goods FOB shipping point and they are in transit on the last day of the period, the buyer must include those goods in its ending inventory (and record the related payable), even though nothing has physically arrived. Forgetting to do so understates inventory and can misstate cost of goods sold and net income. Under FOB destination, the buyer correctly excludes in-transit goods, and the seller keeps them on its books until they land.
FOB shipping point vs FOB destination
| FOB shipping point | FOB destination | |
|---|---|---|
| Title transfers | When goods leave the seller | When goods reach the buyer |
| Goods in transit belong to | Buyer | Seller |
| Who typically pays freight | Buyer | Seller |
| Freight cost account | Freight-in (adds to inventory cost) | Freight-out (selling expense) |
Notice that the party that owns the goods in transit generally also bears the shipping cost and the risk of loss. Under FOB shipping point the buyer pays freight-in, which becomes part of the inventory's cost. Under FOB destination the seller pays freight-out, treated as a selling expense.
The bigger picture
The rule flows from a single principle: inventory is recorded by whoever holds legal title, and the FOB term tells you exactly when that title changes hands. Ask "where does ownership pass?" — at the shipping point (buyer owns it in transit) or at the destination (seller owns it in transit). Get that right and inventory, freight treatment, and risk of loss all fall into place. This is why simply asking who is holding the box is the wrong test; the shipping terms, not physical possession, determine the answer.
| Title/ownership transfers | When goods leave the seller | When goods arrive at the buyer |
| Goods in transit counted by | Buyer | Seller |
| Who bears risk of loss in transit | Buyer | Seller |
| Who typically pays freight | Buyer (freight-in) | Seller (freight-out) |
| Freight cost treatment | Added to inventory cost | Selling expense |
Frequently asked
What is the difference between FOB shipping point and FOB destination?
FOB shipping point means title passes to the buyer when goods leave the seller, so the buyer owns them in transit. FOB destination means title passes only when goods reach the buyer, so the seller owns them in transit.
Who owns goods in transit under FOB destination?
The seller. Under FOB destination, ownership does not transfer until the goods physically reach the buyer's location, so any goods still in transit remain in the seller's inventory and the buyer records nothing until delivery.
When does title to goods transfer to the buyer?
It depends on the shipping terms. Under FOB shipping point, title transfers when the goods leave the seller and are given to the carrier. Under FOB destination, title transfers when the goods are delivered to the buyer.
Who pays freight under FOB shipping point?
The buyer typically pays freight under FOB shipping point. This cost is recorded as freight-in and added to the cost of the inventory, since the buyer owns the goods from the moment they leave the seller.