An income statement includes all sorts of financial information, including expenses that may be difficult to classify. Freight charges are recurring costs, especially for large corporations involved in the international shipment of products and products. Since freight charges are a part of the cost of Goods Sold, you can track them with your accounting effectively once you know how to do it.
Freight charges, freight out charges, recording these charges, difference between freight out and freight in, an example, some related terms are discussed in this article.
Defining Freight In: Inbound Shipping Costs
Freight in is an important financial concept in logistics and supply chain management and is one of the ways organizations measure overall transportation costs within their operations. It includes the cost of raw materials and shipping expenses. These expenses are part of a business’ regular operation, and they are recorded as a debit in their accounting records. Accurately accounting for freight in is crucial for businesses to manage their expenses correctly and calculate the true cost of goods sold.
How to Properly Document Freight In?
Businesses should follow these five steps to accurately account for the costs of freight in within their records:
- Calculate the total freight costs: include all shipping-related costs, including shipping, handling, storage, port fees, and transportation from the port to the final destination.
- Debit the inventory account: subtract the freight charge from the inventory account to give an accurate cost of the materials or goods received.
- Credit cash or accounts payable: decrease cash if paid immediately, or create a liability if payment is due later.
- Keep your inventory records up to date: freight in costs is part of the cost of goods sold (COGS) when inventory is sold. Accurate reporting ensures the correct calculation of profit margins.
- Add the freight charge to the company financial statements: list the freight charge as a direct cost under the cost of goods sold on the income statement. Additionally, it should be represented as a reduction in the inventory account on the balance sheet.
Defining Freight Out: Outbound Shipping Costs
Freight Out is the expense in the hauling of goods from a supplier or a vendor to receiving customers that can be businesses or any individuals. The main classification here is that freight out expenses are incurred by companies only once they have sold goods hence not categorized under operating expenses. For the shipper, freight out charges are treated as an expense unless the customers are made to bear such charges. When this is done, it is still treated as COGS expense incurred in logistics but also recognized as sales or accounts receivable. Trading, purchasing costs, and logistics, which include freight in and out expenses, are treated as direct costs.
How Should You Treat Freight Out Charge?
Use these three steps to outline properly the treatment of freight out in your income statement:
- Freight Out Expense Incurred Cost should be charged.
Freight out charges are made when the complete charge is clearly known even though some of these charges are not known until the invoice is received. Therefore, some may chalk out the expense at a consequent point in the accounting books and only after freight out charges are felt.
- Deduct From Freight Out in the Income Statement every Selling Expense incurred.
Since the cost of dispatching goods is based on the amount of the sales made during the period, it has to be treated as a selling expense, that is to say, it has to be included as part of the COGS. Expenses incurred in selling activities are reported in the COGS Section of the income statement. This classification accentuates the point of distinguishing variable sales related expenses from operating expenses, as freight out is clearly not an operating expense. Since the expense in freight out varies with the sales turnover, planning such type of expenditure also becomes more practical and sensible.
- Customer Billing
The unpaid bill should be reflected in the income statement as the cost of freight out to the customer paid as a dollar and unpaid. During the time of payment by the client, this amount offsets the bill. In some cases, this can lead to negative freight out cost if the amount levied on the client and the amount billed differs. If your business is primarily concerned with freight out, block the billing to the customer from a bill classification and treat it as revenue.
Freight Out vs. Freight In
In Simply put, freight out and freight in can be divided into two different accounting expenses and here is the tip of the iceberg:
Freight Out:
Freight out means the expenses that are incurred in the shipment of goods from the business premises to the customer or client. Normally this cost is incurred to manufacturers, factories and wholesalers as they do ship goods to other businesses. Anime.45 base prices are for freight in: freight out costs are sometimes absorbed by the customer.
Freight In:
This is the cost of bringing in goods from a supplier or manufacturer. This cost is standard for shops or showrooms or even manufacturers who generally get materials or products from another site. Freight in is entered as an expense when product is received and becomes an element in the overall cost of the inventory level.
Accounting Treatment of Freight Costs
What Is Freight Accounting?
Freight accounting deals with any operating expense related to the transportation of cargo.
It consists of tracking any shipping expense, like transportation, merchandise inventory storage, customs clearance, and other payments related to shipping and transport management.
Businesses involved with shipment logistics, consignment handling, or freight brokers need to track their freight accounting since it can help them optimize their costs and revenue.
Here are a few examples of components calculated in freight cost accounting, such as:
- Assets Value: which is the real price/expense of goods sold. Changes in asset value (depreciation, asset impairment, etc.) can affect financial performance and freight operations.
- Freight Expense: The payment made to purchase the shipping process, transportation, warehousing etc.
- Freight In: The delivery cost that goes in the movement of goods from the sender to the receiver and is paid by the receiver
- Freight Out: This is when the seller pays the entire freight cost, which will also be added to the price of the product.
- Freight On Board (FOB): The individual responsible for paying the shipping costs when a seller transfers ownership of the inventory or goods sold to the buyer officially.
- FOB Shipping Point (Free On Board Shipping Point): A code indicating that the buyer must pay the shipping charge on goods when they reach the shipping point.
- Free On Board Destination (FOB Destination): For this approach, it falls on the seller to replace damaged inventory while it makes its way through the shipment process. This responsibility continues until the goods are delivered to a point set in an agreement contract and/or invoice between the suppliers and the buyer.
Importance of Freight Accounting for Your Business
Below are the benefits of freight accounting for businesses in the logistics industry:
- Greater Financial Control and Shipment Visibility: A freight expense account lets you record all freight-related costs (freight-in and freight out payments, inventory management, etc.) and use them for future expense planning. You can also use the data from your financial accounting information to see how the shipment has progressed.
- Increased Accuracy and Efficiency: Freight accounting automates critical accounting processes, reducing the potential for human error. It also makes storing and tracing any shipment document or invoice easier.
- Improved Financial Modeling and Analysis: Freight accounting streamlines the process of reviewing previous freight expenses for financial modeling and analysis. Plus, it also helps you create financial statements for freight forwarding deals since you have all your freight accounting documents in one place.
- Enhanced Integration and Collaboration: Most freight accounting software integrates with your freight forwarding or shipping processes. This helps smoothen collaboration between managers, employees, and third parties who can view assigned tasks and schedules.
- Streamlined Tax Procedures: Filing taxes takes less time and effort when you can easily access all your freight accounting expenses or transactions. It also helps you apply the correct tax rate to transactions and follow tax compliance. Filing taxes takes less time and effort when you can easily access all your freight accounting expenses or transactions.
What affects freight costs?
Multiple factors affect how much it costs to transport goods, including:
- Mode of transportation: The type of transportation, such as truck, airplane, ship or train, affects the costs freight companies charge customers.
- Weight of cargo: Heavier loads cost more to transport than lighter loads due to additional fuel costs and extra wear on the mode of transportation.
- Fuel: A variation in fuel costs can make your freight price either cheaper or more expensive. So when fuel costs go up, freight companies usually charge more to adjust for that expense, but when fuel goes down, companies transporting goods can save money.
- The demand for freight: If there are more freight shipping companies than there is freight, freight companies will be able to charge more for their services. Fewer demand often translates into more affordable rates for a freight company’s clients.
- Risk: Traveling through dangerous conditions or areas or transporting hazardous material can increase freight costs.
- Regulations: Certain government regulations that affect transportation can affect freight costs, including limitations on driving hours, emission tax laws and reductions in cargo volume.
Impact on Financial Statements
Freight In raises the Cost of Goods Sold (COGS) on the income statement, impacting the company’s profits. It also increases the inventory value on the balance sheet until the items are sold.
Freight Out raises operating expenses (SG&A) on the income statement, which lowers net income. It does not influence the balance sheet unless charged to the customer, where it could show up as a receivable.
Practical Example of Freight In and Freight Out
HMS, Inc. is a manufacturer of children’s books. Hometown Books is a chain of retail book stores that orders a large shipment from HMS, Inc. The contract states that Hometown Books will pay the costs to transport the books from the HMS factory to the book stores throughout Ohio. In this exchange, Hometown Books considers this transaction freight in because they paid freight costs as the buyer of goods.
FAQs
What is the difference of freight in and freight out?
Freight in refers to the cost to ship goods into a business and is a part of inventory or COGS. Freight out is the cost of transporting goods to customers and is accounted as an operating expense.
Product inside a freight ship is an example of freight in?
A retail shop pays $500 to move purchased inventory from a supplier to its warehouse.
Does COGS include freight in or freight out?
Freight in is part of COGS. Freight out is recorded as an operating expense.
Who pays in freight out?
The seller typically pays freight out costs unless passed to the buyer.
Who pays freight inward?
The buyer pays freight inward costs as part of acquiring goods.
What is an example of freight out?
A manufacturer pays $200 to ship finished goods to a wholesaler.
Should freight in be included in inventory?
Yes, freight in costs should be added to inventory value until goods are sold.
Who pays shipping costs on FOB destination?
The seller pays shipping costs under FOB destination until the goods reach the buyer.
How do you treat freight-in accounting?
Freight in is debited to the inventory account or COGS and credited to cash or accounts payable.
Conclusion: Importance of Differentiating Freight Costs
Be sure to differentiate between freight in (costs for getting goods in) and freight out (costs for sending goods to customers).
Doing this helps with accurate cost tracking, pricing decisions, and financial records. Properly sorting these costs leads to better inventory assessments and clearer financial reports, plus it aids in budgeting. Clearly separating these expenses helps in making better business decisions and boosts overall efficiency.
