If you belong to the freight industry, chances are you might’ve encountered some new accounting expenses and jargon that you wouldn’t find in other sectors.
But understanding these terminologies is key to knowing how companies orchestrate the cost structure in the freight industry. A term you come across in accounting is freight expenses. Freight charges are the charges incurred by manufacturing companies, online stores, and international companies that use regular shipping services.
Freight charges are further divided into freight-in and freight-out expenses. Since entities in the freight industry perceive these costs differently, it is often confusing to categorise these specific costs.
Learning more about freight expenses helps you determine the ways to record the entries in accounting.
In this article, you’ll learn:
- What is freight out
- How to calculate it
- The difference between freight in and freight out expenses
What is Freight Out in Accounting?
In accounting, freight out is the cost of moving products away from the shipper to a customer.
When the seller handles the shipping costs, they regard it as a delivery expense rather than an operating expense since the delivery costs are specifically associated with selling.
What is Freight in and Freight Out?
The contract between the buyer and the seller determines the costs associated with shipping.
The freight in and freight out expenses are a part of the logistics costs but there are several key differences in the picture when it comes to who pays for the shipping and how it is recognised in the merchandising transactions.
Understand that it is the establishment of a transfer point and ownership that define various factors like:
- Who pays the shipping charges
- How both parties perceive them in the balance sheet
- How buyers and sellers record these transactions, etc.
Freight-in Expenses
Freight-in expenses are those costs for which the buyer is responsible when receiving the shipment from the seller. Since the shipping costs are incurred by the buyer, they recognise this as a part of the buy costs and the shipping costs stay with the inventory until it is sold.
From the buyer’s perspective, the expense is a part of the item ready for sale. It is reported on the balance sheet in the merchandise inventory. When the goods are sold, the charges are transferred to the rest of the inventory costs under the Costs of Goods Sold on the income statement.
Freight-in is a common expense for stores, manufacturers, and businesses. They source their materials from other places and add the expense to the cost of receiving goods.
For example, an electronic store, Agile Electronics, may buy 40 computers from a manufacturer for $250 per piece. The agreement is that Agile Electronics (buyer) will pay the domestic freight expense of $1000 to the seller.
Agile Electronics would record the entry to recognise the buying of the goods and freight-in. The total costs of the inventory would amount to $11000 (40*250 + $1000).
Freight Out Expenses
So, as we discussed, freight-out costs are treated very differently. Instead of being treated as part of the cost of goods sold, the charges will be associated with delivery expenses in the income statement.
Freight out is not an operating expense since it isn’t something the supplier incurs on a day-to-day basis but only when they transport and sell the goods to a customer. Such expenses are common for factories and wholesalers as they frequently ship goods to other businesses and pass along the freight-out expense to them.
For example, Agile Electronics sells a computer to a customer and covers the $100 international shipping costs associated with the shipping and insurance. The store would then record them as freight out charges and add a separate entry under ‘delivery expense’ of $100.
In this case, the delivery expense increases (debit), and cash decreases (credit) for the shipping cost amount of $100. The income statement will record this $100 delivery expense will be clubbed with selling and administrative expenses.
How do you Record Freight Out?
You can record your freight out charges in three following ways.
1. Charge Freight Out when you incur the cost
One way you can go about it is to account for your freight out charges when you actually incur the cost of shipping your goods. But, you can never tell the exact amount of freight until they’re actually invoiced so you are not able to do it immediately.
To address this issue, most companies record their freight out expenses at the time that they receive the invoice, regardless of the period they incurred the freight cost.
2. Record it as the Cost of Goods Sold
Costs associated with freight out are directly related to the number of goods you sell, so you can categorise them into the cost of goods sold.
Calculating the freight costs under the costs of goods sold reflects that the shipping cost isn’t an operational expense but an expense that is dependent on the number of goods you sell.
It’s beneficial to calculate the costs this way since you can allocate the budget for your costs more efficiently considering that the number fluctuates according to the sales instead of incurring it as a fixed cost.
3. Pass on the expense to the customer
If you are passing on the freight out the expense to the customer, you can record the entry in accounting as an unpaid bill in the income statement next to freight expense.
When the customer pays, you can strike out the cost. The billings to customers should only be treated as revenue when doing so is the primary revenue-generating activity.
Concluding Thoughts
For companies that ship goods on a regular basis, freight expenses are an inevitable and significant expense. Knowing the costs in detail and how to handle them can improve a business’s bottom line. Eventually, recording them in the right manner paves the way for managers to make accurate financial projections and sound business decisions.
