Year End Inventory Accounting for Goods in transit: Accounting for goods in transit at the end of the reporting period will depend upon the terms of trade. Where goods are purchased on an FOB shipping basis, the goods belong to the purchaser from the time they are shipped, and should be included in inventory/accounts payable at the end of the reporting period. All such purchases in transit will need to be identified and the adjusting journal entry should be posted.
If goods are purchased on FOB destination terms, no adjustment will be required because the goods still legally belong to the supplier.
If goods are sold on FOB destination terms, they belong to the entity until they arrive at the customer’s premises. Because the sale will have been recorded in the current year, the adjusting entries will be required to remove that sale and reinstate the inventory.
Consignment inventory
Care must be taken in the treatment of consignment inventory. Under a consignment arrangement, an agent (the consignee) agrees to sell goods on behalf of the consignor on a commission basis. The transfer of goods to the consignee is not a legal sale/purchase transaction. Legal ownership remains with the consignor until the agent sells the goods to a third party. Steps must be taken to ensure that goods held on consignment are not included in the physical count. Equally, goods owned by the entity that are held by consignees must be added to the physical count.
Control account/subsidiary ledger reconciliation
This end-of-period procedure is required only under the perpetual method. The general ledger account balance must be reconciled with the total of the subsidiary ledger (manual or computerized). Recording errors and omissions will cause the reconciliation process to fail. Any material discrepancies should be investigated and corrected. This process will identify only amounts that have not been posted to both records; it cannot identify errors within the subsidiary records, such as posting a purchase to the wrong inventory item code. However, the physical count/recorded figure reconciliation will isolate these errors.
