Understanding the terms freight in and freight out is crucial for businesses involved in the movement of goods. Both terms deal with transportation expenses, but they are recorded differently depending on whether the freight is incoming or outgoing. This article will define these terms, explain how to record them and address common questions related to freight in final accounts.
What Is Freight In?
Freight refers to the cost of transporting goods to your business location. It includes all expenses related to moving goods from the supplier to the buyer’s warehouse or premises. These costs are often incurred when goods are purchased for resale, manufacturing, or storage.
In freight in final accounts, these expenses are recorded under inventory or cost of goods purchased. It is important to note that the freight in charges are capitalized as part of the cost of acquiring inventory and will be reflected in the balance sheet.
How to Record Freight In
When you receive goods, the freight in cost should be added to the cost of the goods. In accounting, this can be recorded as follows:
- Debit the Inventory account (for the cost of the goods) and the Freight In account (for transportation charges).
- Credit the Accounts Payable account to reflect the liability.
By doing so, the freight in final accounts ensures that the cost of transportation is accounted for alongside the cost of goods, which will be included when calculating the total cost of inventory or cost of sales.
What Is Freight Out?
Freight out refers to the cost of shipping goods from your business to customers or other destinations. This can include the delivery of products after they have been sold or dispatched as part of your supply chain operations. Unlike freight in, freight out is considered a selling expense.
In freight in final accounts, freight out is typically recorded as an operating expense, often listed under distribution costs or selling expenses. It does not get added to the cost of goods sold but is treated as a period cost.
How to Record Freight Out
When shipping goods to customers, the accounting entry for freight out is usually:
- Debit the Freight Out expense account (for the transportation cost).
- Credit the Accounts Payable or Cash account (depending on how the payment is made).
This treatment helps distinguish freight costs incurred as part of sales transactions from those related to inventory acquisition in the freight in final accounts.
Frequently Asked Questions
Who Pays for Freight In and Freight Out?
In most cases, the buyer is responsible for freight, meaning they pay for the transportation of goods to their premises. However, this can be negotiated between the buyer and the seller.
On the other hand, freight out is typically paid by the seller, especially if it is included as part of the selling terms, like Free On Board (FOB) or Free Carrier (FCA). In some cases, the seller may charge the customer for freight out, particularly when delivery fees are passed along as part of the sale agreement.
How Do You Know If It’s Freight In or Freight Out?
The key difference lies in the flow of goods:
- Freight refers to the transport of goods into your business, from the supplier to your premises or warehouse.
- Freight out refers to the transportation of goods from your business to the customer.
In accounting terms, the distinction is made based on whether the expense is related to acquiring goods or selling and delivering them.
Conclusion
In conclusion, understanding the distinction between freight in and freight out is essential for accurate financial reporting. Freight in final accounts involves recording transportation costs related to acquiring inventory, while freight out is an expense related to the sale and delivery of goods to customers. Properly recording these costs helps businesses maintain accurate financial statements and ensures compliance with accounting principles. By distinguishing between these two types of freight expenses, businesses can more accurately track their transportation costs and make better-informed decisions.
