Your supplier shipped a container in December, but it will not reach Singapore until January. The invoice has arrived, a deposit may already have been paid, and your logistics team can track the vessel’s progress. As finance prepares the year-end accounts, a question arises: should those goods appear in this year’s inventory?
It is tempting to use a simple rule. Some businesses record purchases when the invoice arrives, while others wait until the warehouse receives the goods. Either approach can produce an incorrect result if it ignores the actual contractual arrangement.
For trading companies preparing for Audit Services, goods in transit deserve attention because physical location does not settle the accounting question. Management needs to understand the company’s rights and obligations at the reporting date and retain evidence supporting the treatment.
Being Outside the Warehouse Does Not Automatically Exclude Inventory
A warehouse count identifies goods physically present at a location. It does not necessarily identify everything that should be included in the company’s inventory.
Goods may be travelling between countries, held by a logistics provider, or stored at another location. Depending on the arrangement, the company may need to recognise them even though its warehouse team has not received them.
The reverse also matters. Goods physically held in your warehouse may belong to a supplier or customer under a consignment or storage arrangement. Preparing the inventory figure therefore requires a review of the relevant rights and obligations, alongside quantities and locations.
Begin With the Purchase Agreement
Start by reviewing the contract, accepted purchase order, and any incorporated terms. Identify what the supplier has promised, the agreed delivery arrangements, and provisions affecting transfer, acceptance, or cancellation.
Check whether later correspondence changed the original agreement. A purchase order may refer to one delivery arrangement while an agreed amendment introduces different responsibilities. Finance needs the complete position rather than whichever document happens to be attached to the invoice.
For example, a supplier’s standard terms may differ from the terms negotiated for a particular shipment. If the documents conflict, obtain clarification and appropriate advice. An accounting conclusion should not depend on silently choosing the document that produces the preferred year-end result.
Understand What Shipping Terms Do and Do Not Establish
Incoterms provide a framework for allocating specified delivery obligations, costs, and risks between buyers and sellers. They can offer important evidence about the transaction, but they do not determine the transfer of legal ownership.
Record the complete agreed term, including the named place or port and the applicable version. An abbreviation without its location can leave important questions unanswered. Also consider any contractual modifications rather than assuming the standard wording applies unchanged.
Do not reduce the accounting policy to a statement such as “all FOB shipments are December inventory.” Shipping terms form part of the assessment. The conclusion must reflect the complete contract, the relevant facts, and the applicable financial reporting framework.
Assess the Accounting Position Rather Than One Isolated Indicator
For revenue recognised at a point in time under IFRS 15 and its Singapore equivalents, control is central. Relevant indicators include rights to payment, legal title, physical possession, risks and rewards, and customer acceptance. Physical possession and control do not always coincide.
A purchaser must separately assess its inventory and related obligation under its applicable reporting framework. The supplier’s invoice or revenue treatment can provide information, but it does not replace the purchaser’s own assessment.
Management should document how the contractual terms and shipment facts support the conclusion. Where acceptance clauses, unusual payment conditions, or other provisions create uncertainty, discuss them with the accountant before finalising the year-end entries.
Consider Two Different Year-End Outcomes
Imagine a trading company with a 31 December year-end purchasing goods costing S$150,000. The goods leave the supplier in December and arrive in Singapore in January. The following examples are simplified and exclude tax, currency movements, and additional costs.
In the first scenario, management’s assessment establishes that the company should recognise the goods and the corresponding unpaid obligation before 31 December. The goods would be included as inventory in transit, with the relevant payable recorded, even though the container has not arrived.
In the second scenario, the contract and circumstances establish that recognition occurs only after the reporting date. The company would not include the goods as its inventory at 31 December merely because the supplier issued an invoice in December. Any advance payment would require its own appropriate treatment.
The same sailing and arrival dates can therefore sit within different accounting outcomes. The purpose of reviewing the documents is to establish which outcome the actual transaction supports.
Do Not Let the Invoice Date Decide Everything
An invoice is an important accounting document, but its issue date may precede or follow the event relevant to recognising the goods and obligation. Automated processing can obscure this distinction if every supplier invoice is immediately treated as an ordinary inventory receipt.
Review invoices issued close to year-end alongside shipping and contractual evidence. Also look for shipments requiring recognition where the supplier’s final invoice has not yet arrived.
For example, logistics may confirm that a shipment reached the relevant contractual stage in late December, while accounts payable receives the invoice in January. Finance needs a process for identifying such transactions and determining whether a supported year-end accrual or other entry is required.
Keep Advance Payments Separate From Inventory Recognition
Paying a deposit does not automatically mean the goods have become the company’s inventory. The payment may represent an advance for a future delivery, depending on the arrangement.
Reconcile supplier advances to the relevant purchase orders and shipments. Identify what has been paid, what remains payable, and when the advance should be applied against the recognised transaction.
Suppose the company has paid S$30,000 towards a S$150,000 shipment. When the goods and obligation are recognised, the accounting process should properly apply that advance and record the remaining position. Recording the full invoice without clearing or applying the deposit can leave duplicate or misleading balances.
Prepare a Goods-in-Transit Schedule
A useful year-end schedule lists shipments that require review and connects them to the relevant records. Include supplier, purchase order, shipment reference, goods description, quantity, value, shipping terms, and actual or expected arrival date.
Add management’s recognition conclusion and the documents supporting it. Distinguish confirmed events from estimated dates. An expected departure date is different from evidence that loading actually occurred.
Assign responsibility for maintaining the schedule. Purchasing may hold the contract, logistics may hold shipment records, and finance may hold invoices and payments. Someone needs to bring those sources together so that the year-end assessment does not depend on incomplete information from one department.
Use Shipment Documents for the Questions They Can Answer
Bills of lading, carrier records, freight forwarder correspondence, packing lists, and subsequent goods-received records can help explain the shipment’s progress. Each document should be considered for what it establishes.
For example, a booking confirmation may demonstrate that transport was arranged without proving that the goods were loaded. A later warehouse receipt can support subsequent arrival, but does not alone establish the company’s accounting position at the earlier year-end.
Check consistency across references, quantities, dates, and parties. If the invoice identifies one shipment while the transport document relates to another, resolve the mismatch. A large document folder is useful only when the evidence can be connected to the transaction being assessed.
Reconcile the Schedule With the Inventory System
Some inventory systems record goods only when warehouse staff complete a receipt. That workflow may work operationally while requiring a separate accounting adjustment for recognised goods in transit.
Compare the transit schedule with the inventory ledger and general ledger. Identify how the year-end entry will be recorded and how it will be cleared when the goods arrive. The process should prevent both omission and duplication.
For instance, if finance records a shipment as inventory in transit in December, the January warehouse receipt should not create a second purchase for the same goods. Use the purchase order or shipment reference to connect the entries and verify that the transfer into warehouse stock has been handled correctly.
Review Subsequent Receipts for Cut-Off Issues
Goods received after year-end can provide useful evidence when assessing whether the earlier accounts are complete. Review relevant January receipts and connect them to the purchase contracts and shipment history.
This does not mean that every January delivery belongs in December. The review helps identify transactions whose circumstances require closer examination rather than applying a blanket backdating rule.
Similarly, examine unusual entries immediately before year-end. A receipt entered early to close a purchase order may not reflect what physically or contractually happened. Explain the difference between the system’s processing date and the underlying event before deciding on the accounting treatment.
Consider Outbound Shipments Separately
Trading companies may also have goods travelling to customers at year-end. The purchase-side conclusion does not automatically determine when the onward sale should be recognised.
Review the customer contract and delivery evidence independently. Goods purchased from a supplier may have become your inventory before year-end while remaining your inventory during onward transport because the customer has not yet obtained control under the relevant arrangement.
Where goods are shipped directly from the supplier to the customer, the absence of a warehouse movement makes documentation especially important. Map the purchase and sale separately so that neither side is recorded solely because the other transaction has been processed.
Check Value as Well as Inclusion
Deciding that a shipment belongs in year-end inventory is only part of the review. Management also needs a supportable value and an understanding of any issues affecting recoverability.
Identify the purchase cost and assess relevant freight, insurance, duties, discounts, and other amounts under the applicable inventory accounting requirements. Avoid adding every shipment-related expense automatically or omitting costs simply because the invoice arrives later.
If the goods are damaged, delayed, disputed, or becoming difficult to sell, investigate the implications. An insurance policy or supplier claim does not remove the need to assess the inventory itself. Any potential recovery should be considered separately on its own facts.
Coordinate With Suppliers and Group Finance
Where the supplier is a related company, compare the recorded balances and shipment details on both sides. Differences may arise from processing dates, currency, missing documents, or inconsistent interpretations of the terms.
Resolve the reason rather than forcing the balances to agree through an unexplained adjustment. Agreement between two ledgers is useful, but it does not prove that the underlying recognition is correct.
For groups preparing consolidated accounts, shipment cut-off can also affect intercompany balances and consolidation adjustments. Give group finance a clear explanation of significant goods in transit and any unresolved matters early enough for the reporting timetable.
Prepare for the Audit Before the Year-End Close
Discuss material goods-in-transit arrangements with the audit team during planning. Explain how shipments are identified, who assesses the terms, and how finance reconciles the resulting schedule.
The auditor may request contracts, shipment records, supplier evidence, subsequent receipts, and other information depending on the risks and circumstances. Goods that cannot be inspected in the company’s warehouse require an appropriate evidence approach; a management spreadsheet alone may not resolve every question.
Keep responsibility clear. Management prepares the accounts and supports its conclusions, while the auditor independently evaluates the evidence. Early discussion helps identify information needs without treating the auditor as the person responsible for maintaining the company’s shipment records.
Discuss Your Trading Company’s Audit With Kazuma
Kazuma Public Accounting Corporation provides statutory and financial statement audits, group audit work, and parent-company consolidation package audits. These services are relevant to trading businesses whose reporting involves overseas suppliers, customer deliveries, and multiple entities.
When discussing Audit Services with Kazuma, provide examples of your main shipping arrangements, significant year-end shipments, and the accounting process used for goods in transit. Highlight unusual acceptance conditions, direct shipments, or differences between operational records and the ledger.
Goods still at sea can belong in the current year’s accounts, but the answer requires more than checking the vessel’s location. A clear assessment combines the contract, the relevant shipment events, and the applicable accounting requirements. Keeping that evidence organised helps management report inventory and obligations in the right period.