Goods-in-transit
This query is : Resolved
03 June 2017
In case of goods-in-transit, the following entry is passed:
Goods in transit Dr
To Creditors account
Next year, on actual receipt of such goods,
Purchases Dr
To Goods in transit
Such amount of goods-in-transit in includible in inventory as per Sch III of Companies Act 2013.
My query is that inclusion of goods-in-transit in closing inventory inflates inventory resulting in overstatement of profits. Does this not distort the "true and fair view" aspect?
Goods in transit Dr
To Creditors account
Next year, on actual receipt of such goods,
Purchases Dr
To Goods in transit
Such amount of goods-in-transit in includible in inventory as per Sch III of Companies Act 2013.
My query is that inclusion of goods-in-transit in closing inventory inflates inventory resulting in overstatement of profits. Does this not distort the "true and fair view" aspect?
03 June 2017
Such goods in transit will only part of balance sheet inventory not closing stock of P&L. Hence no effect on profit.
03 June 2017
Sir,
Thank u for ur reply. But if we dont include in closing inv in trading ac how is thw double entry effect complete? Kindly give reference to anything contained in financial reporting framework
26 July 2024
Your query addresses an important aspect of accounting for goods-in-transit and its impact on financial statements. The inclusion or exclusion of goods-in-transit in closing inventory indeed affects the financial statements and can have implications for the presentation of a "true and fair view" of the financial position of a company.
### **Accounting for Goods-in-Transit**
**1. Double Entry Accounting for Goods-in-Transit**
When goods are in transit, the accounting entries typically are as follows:
**a. On Shipment of Goods**
- **Goods in Transit Account (Dr)**
- **Creditors Account (Cr)**
This entry reflects that the goods are in transit, and the liability to the creditor has been recognized.
**b. On Receipt of Goods**
- **Purchases Account (Dr)**
- **Goods in Transit Account (Cr)**
This entry reflects the actual receipt of goods and moves the amount from the Goods in Transit account to the Purchases account.
### **2. Treatment of Goods-in-Transit in Financial Statements**
**a. **Include Goods-in-Transit in Inventory**
According to Schedule III of the Companies Act, 2013, goods-in-transit should be included in closing inventory. This is because:
- **Inventory Valuation**: Goods-in-transit are still part of the inventory until they are physically received and processed. Including them in closing inventory provides a more accurate reflection of the inventory that is expected to be sold.
- **Consistency**: It aligns with the principle of matching costs with revenues and ensures that the inventory on hand, including those not yet physically received but purchased, is reported accurately.
**b. **Impact on Profits**
- **True and Fair View**: Including goods-in-transit in closing inventory ensures that the cost of goods sold (COGS) and closing inventory are both accurately reported. This avoids the understatement of inventory and overstatement of COGS, which could otherwise distort the true and fair view of the company's profitability.
- **Accounting Standards Compliance**: This treatment is in line with accounting standards such as Ind AS 2 (Inventory) and the principles of accrual accounting, which require that expenses and revenues be matched in the period in which they occur.
### **3. Financial Reporting Framework**
**a. **Ind AS 2 (Inventory)**
- **Definition**: Ind AS 2, which is the Indian equivalent of IAS 2 (International Accounting Standard 2), deals with the measurement of inventory. It states that inventory should include all costs incurred in bringing the inventory to its present location and condition.
- **Paragraph 10**: "Inventories should be measured at the lower of cost and net realizable value." Cost includes all costs of purchase, conversion costs, and other costs incurred in bringing the inventories to their present location and condition.
- **Inclusion of Goods-in-Transit**: Ind AS 2 specifies that goods-in-transit should be included in inventory if they are still part of the company's stock. This ensures that inventory valuation reflects the true amount of stock available for sale.
**b. **Accrual Accounting Principle**
- **Matching Principle**: This principle requires that expenses be matched with the revenues they help to generate. By including goods-in-transit in inventory, you align the cost with the revenues of the period in which the goods are expected to be sold.
### **4. Addressing Concerns of Overstatement**
To ensure that the inclusion of goods-in-transit does not lead to distortion:
- **Regular Reconciliation**: Regularly reconcile goods-in-transit accounts and ensure they are accurately recorded and reported.
- **Proper Disclosure**: Provide adequate disclosure in the financial statements regarding the nature of goods-in-transit, any significant amounts involved, and their impact on inventory valuation.
### **Summary**
**Inclusion of Goods-in-Transit in Closing Inventory** is required by accounting standards and reflects the true value of inventory that is expected to be sold. This treatment ensures accurate financial reporting and aligns with the principles of accrual accounting and inventory valuation.
**Reference**:
- **Ind AS 2 (Inventory)**, especially paragraphs related to cost and inventory valuation.
- **Schedule III of Companies Act, 2013**, which outlines the presentation of financial statements including inventory.
Proper inclusion ensures that the financial statements present a true and fair view and avoids the misstatement of profits.
### **Accounting for Goods-in-Transit**
**1. Double Entry Accounting for Goods-in-Transit**
When goods are in transit, the accounting entries typically are as follows:
**a. On Shipment of Goods**
- **Goods in Transit Account (Dr)**
- **Creditors Account (Cr)**
This entry reflects that the goods are in transit, and the liability to the creditor has been recognized.
**b. On Receipt of Goods**
- **Purchases Account (Dr)**
- **Goods in Transit Account (Cr)**
This entry reflects the actual receipt of goods and moves the amount from the Goods in Transit account to the Purchases account.
### **2. Treatment of Goods-in-Transit in Financial Statements**
**a. **Include Goods-in-Transit in Inventory**
According to Schedule III of the Companies Act, 2013, goods-in-transit should be included in closing inventory. This is because:
- **Inventory Valuation**: Goods-in-transit are still part of the inventory until they are physically received and processed. Including them in closing inventory provides a more accurate reflection of the inventory that is expected to be sold.
- **Consistency**: It aligns with the principle of matching costs with revenues and ensures that the inventory on hand, including those not yet physically received but purchased, is reported accurately.
**b. **Impact on Profits**
- **True and Fair View**: Including goods-in-transit in closing inventory ensures that the cost of goods sold (COGS) and closing inventory are both accurately reported. This avoids the understatement of inventory and overstatement of COGS, which could otherwise distort the true and fair view of the company's profitability.
- **Accounting Standards Compliance**: This treatment is in line with accounting standards such as Ind AS 2 (Inventory) and the principles of accrual accounting, which require that expenses and revenues be matched in the period in which they occur.
### **3. Financial Reporting Framework**
**a. **Ind AS 2 (Inventory)**
- **Definition**: Ind AS 2, which is the Indian equivalent of IAS 2 (International Accounting Standard 2), deals with the measurement of inventory. It states that inventory should include all costs incurred in bringing the inventory to its present location and condition.
- **Paragraph 10**: "Inventories should be measured at the lower of cost and net realizable value." Cost includes all costs of purchase, conversion costs, and other costs incurred in bringing the inventories to their present location and condition.
- **Inclusion of Goods-in-Transit**: Ind AS 2 specifies that goods-in-transit should be included in inventory if they are still part of the company's stock. This ensures that inventory valuation reflects the true amount of stock available for sale.
**b. **Accrual Accounting Principle**
- **Matching Principle**: This principle requires that expenses be matched with the revenues they help to generate. By including goods-in-transit in inventory, you align the cost with the revenues of the period in which the goods are expected to be sold.
### **4. Addressing Concerns of Overstatement**
To ensure that the inclusion of goods-in-transit does not lead to distortion:
- **Regular Reconciliation**: Regularly reconcile goods-in-transit accounts and ensure they are accurately recorded and reported.
- **Proper Disclosure**: Provide adequate disclosure in the financial statements regarding the nature of goods-in-transit, any significant amounts involved, and their impact on inventory valuation.
### **Summary**
**Inclusion of Goods-in-Transit in Closing Inventory** is required by accounting standards and reflects the true value of inventory that is expected to be sold. This treatment ensures accurate financial reporting and aligns with the principles of accrual accounting and inventory valuation.
**Reference**:
- **Ind AS 2 (Inventory)**, especially paragraphs related to cost and inventory valuation.
- **Schedule III of Companies Act, 2013**, which outlines the presentation of financial statements including inventory.
Proper inclusion ensures that the financial statements present a true and fair view and avoids the misstatement of profits.
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