When a company, as the buyer, is required to pay for the transportation of products purchased from suppliers, freight-in costs are incurred. Similarly, suppose the firm utilizes the perpetual inventory system.
In that case, the company must record a journal entry for freight-in by recognizing this expense as a component of goods inventory or as a part of the net cost of purchases if the company employs the periodic inventory system.
Under the periodic inventory system, journal entry for freight-in is a little easier because the corporation only needs to enter this expense in the freight-in or transportation cost account as the net cost of purchases.
After all, the inventory account and cost of goods sold will only be updated when the firm takes a physical inventory count under the periodic inventory system (usually at the end of the period).
On the other hand, the firm must include the freight-in cost in the cost of inventory bought under the perpetual inventory method.
This is because the inventory cost comprises all costs associated with acquiring inventory, including freight-in charges, which are required for products to be delivered to the firm as a buyer.
Journal entry for freight-in
The freight-in journal entry can be made using the periodic inventory system by debiting the freight-in account and crediting the cash account.
Like the purchase account, the freight-in account is a temporary account that will be cleared when the firm calculates the cost of goods after the accounting period.
When the firm calculates the cost of goods sold, the freight-in cost will be added to the product inventory’s net purchase (buy – purchase return and allowance – purchase discount).
Under the perpetual inventory system, the corporation must record the freight-in cost as part of the inventory cost.
Similarly, the company must make a freight-in journal entry by debiting the freight-in cost from the inventory account and crediting the cash account in this case.
For example, on August 1, the company XYZ Ltd. made a cash purchase of merchandise that cost $25,000 from one of its suppliers. And in addition to the $25,000 cost of goods, the company XYZ Ltd. also needs to pay an additional $200 as the freight-in cost for the goods to be delivered to its place.
The firm XYZ Ltd. employs a periodic inventory system and receives the aforesaid products the same day it is ordered.
Below is a journal entry for the freight-in cost and the above-mentioned merchandise acquisition that the firm XYZ Ltd needs to make on August 1.
Consider a company, XYZ Ltd. uses the periodic inventory system. So, it can make the freight-in journal entry as well as the purchase of merchandise on
August 1 as below:
The purchase cost of the merchandise
The purchase cost of products in this journal entry is separate from the freight-in journal entry. This is only to make it more understandable. Mostly, we only keep one journal entry in this case.
Similarly, these two journal entries are generally concatenated to form a single journal entry, as shown below:
Freight-out is the firm’s expense when it pays the transportation price to deliver products to customers. Similarly, the corporation must record it as a cost in the journal when freight-out happens.
Because freight-out is a cost incurred by the firm to assist the sale of its goods, it is usually reported as an item in the income statement’s selling costs column.
While the firm pays for the transportation when making a sale, the freight-out journal entry may be made by debiting the freight-out account and crediting the cash account.
Freight-out is an expense account with a debit balance by default. Similarly, total assets on the balance sheet decline while costs on the income statement increase by the same freight-out cost in this journal entry.
Freight-out or delivery expenses generally serve the same purpose and are similar. As a result, the corporation may occasionally report the freight-out cost as a delivery charge instead.
Consider the case of XYZ Ltd., which pays $200 in transportation costs when it sells and delivers items to one of its clients. So, here the company will make the freight-out journal entry with the $200 as the transportation cost as below:
Total assets on the balance sheet declined by $200, while expenses on the income statement increased by the same amount in this journal entry.
It’s worth noting that, to pay such costs, the company calculates the freight-out cost typically and includes it in the invoice price. As a result of bearing the delivery expenses on the goods sold and delivered to clients, the corporation can prevent a drop in profit margin.
The distinctions between freight-in and freight-out are obvious. If suppliers are liable for the cost, they must report an operating expense, whereas customers may be able to include the cost in the Cost of Goods Sold (COGS).
If a customer does not intend to keep the products in stock, the cost must be expensed accordingly. Buyers and sellers must determine who is liable for shipping when negotiating contracts. Improper freight classification of inbound and outbound freight might alter the gross margin of the receiving company.
It’s crucial to consider how charges will be expensed when shipping or receiving items on the income statement. Freight shipping expenditures are recorded as an operating expense when items are delivered to a client.
If the commodities are included in the inventory, the charges are booked to the cost of goods sold when they are received. When calculating transportation costs, significant allocations include freight in and freight out.