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Accounting For Freight Costs: Freight Expense Account vs. Cost of Freight-Sales Account

accounting for freight costs

Today we continue our series on all things freight accounting by addressing when you should be accounting for freight costs. In our first series we laid out how important it was to understand as a logistics or transportation manager the ins and outs of freight and transportation accounting so that you may better work with your finance department to drive more value from your transportation decisions. In this kind of collaboration, you are able to work together as a management team and drive the company forward in the most cost effective and efficient manner.

When You Should Go About Accounting for Freight Costs 

Across many various business verticals as well as those manufacturing sectors where transportation procurement for your freight is a daily part of the business, there is some uncertainty about how and when to go about accounting for freight costs in an enterprise’s general accounting. Even many accounting professionals may not be entirely familiar with the normal and customary charges that come up when dealing with accounting for freight costs accounting in general. This can lead to confusion which may undermine the accuracy of your financial projections and vital business making decisions. Based on the research of inboundlogistics.com, freight costs can make up 10% of an organization’s expenditures. So, it's vital that you understand when accounting for freight costs should occur.

Luckily, this issue is not nearly as complex as it might appear at first. Accounting for freight costs can generally be handled in a way very similar to other expenses and costs of doing business. There is one key difference, however: accounting for freight costs should be handled diligently and updated on a regular basis, since the accuracy of your accounting can bear on freight claims you might make, and time is a key factor in all such claims.

Generally speaking, your freight expense account is treated just like any other expense account when the accounting equation must be used. Freight expenses are considered to have a normal debit balance, with decreases being noted as credits and increases noted as debits, as a financial professional would probably expect.

If everything about these costs is conventional, what is the cause of the confusion in accounting for freight costs anyway??

There are a few nuanced, but important details to keep in mind in accounting for freight costs:

  • Freight Costs as it relates to assets: If the freight is part of an asset’s cost, it is to be considered an extension of the asset’s overall value. That means that, in practice, it is recorded as part of the asset’s value and figured into your calculations as a “laid down cost.” Your ledger must reflect the figures accordingly.
  • Know Cost of Sales-Freight Account: When accounting for freight costs, freight expense accounts must not be confused with similar types of expense accounts, or other accounts that might be related to your logistics department. It is easy to make the mistake of conflating your freight account with your “cost of sales-freight” account.

However, it’s easy to keep these accounts separate when a few distinctions are kept in mind:

  • When you are shipping freight to your customers, you record the cost of making that delivery in the form of a debit that impacts your freight expense account.
  • When you purchase goods from a supplier and they ship via inbound freight shipping and require you to pay for shipping costs attendant to that order, regardless of how much is paid, you debit your “cost of sales-freight” account.

It is crucial that the members of your accounting team remain vigilant when accounting for freight. Optimizing your freight accounting practices can save you a significant fraction of the cost of every single freight shipment, whether inbound or outbound. One of the critical factors in optimizing your nationwide, regional, or even global supply chain is evaluating existing cost structures and relationships – the better your records, the more opportunities for savings will present themselves. A trustworthy logistics solutions provider can help you maximize your efforts and work with you to provide custom reports will allow you to impact your bottom line and make better business decisions concerning your freight.

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Adam Robinson
Adam Robinson oversees the overall marketing strategy for Cerasis including website development, social media and content marketing, trade show marketing, email campaigns, and webinar marketing. Mr. Robinson works with the business development department to create messaging that attracts the right decision makers, gaining inbound leads and increasing brand awareness all while shortening sales cycles, the time it takes to gain sales appointments and set proper sales and execution expectations.
Adam Robinson
Adam Robinson
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  • Dividendend

    I thought I was gonna learn the “WHEN” part about accounting for freight cost.
    I was dead wrong. This article says NOTHING about the timing of recognizing freight cost.

    • Andrea Wood

      In a way he did, though maybe it wasn’t made as clear as it should have been. Let me elaborate.

      Freight Costs Associated with Inventory Purchases:
      When you purchase inventory from a supplier, you recognize the freight cost as Cost of Goods Sold when you pay it, assuming you will sell your inventory within the reporting period (if you don’t think the product will be sold within the reporting period, you should debit inventory (or create a connected asset account to track costs more accurately), then move the costs from assets to cost of goods sold in the period in which it was sold.

      Freight Costs Associated with Fixed Asset Purchases:
      Include the freight costs in the cost of your asset on the balance sheet – no separate freight account is required.

      Freight Costs Associated with Delivering Sold Goods to Customer:
      These costs should be recognized as a selling expense, not included in COGS, and recognized when incurred.

      Please let me know if you have further questions.

      • Javier W Sanchez

        great!!! explanation more detail as the article itself – good Andrea

  • laurenberge68

    Good post , I learned a lot from the insight ! Does someone know if my company might acquire a sample FTC Identity Theft Affidavit document to type on ?

  • ragged Jeannes

    Hi. Would it be advisable to have a separate account for freight costs of office supplies purchased or sum it up to office supplies as well? Thanks!

    • You should keep the freight separate, as it is not an Office supply expense. It should be coded as freight EXPENSE IN your General ledger and in their P&L.

      • Mark purintun

        This has always been an issue. The same problem arises with tax paid on a purchase. If I have separate Freight and Tax expense accounts and charge these accounts appropriately when vendor invoices are received, the costs of the invoice are spread over the Income Statement or the department report. If I wanted to know the cost of my total Office Supplies, for example, I would not have the freight charges or taxes included in that account. My preference is to charge the entire invoice to Office Supplies account because that would then contain the entire costs of my purchases for office supplies. Freight charges and taxes could be 15% (or more) of the purchase.

      • Mark purintun

        This has always been an issue. The same problem arises with tax paid on a purchase. If I have separate Freight and Tax expense accounts and charge these accounts appropriately when vendor invoices are received, the costs of the invoice are spread over the Income Statement or the department report. If I wanted to know the cost of my total Office Supplies, for example, I would not have the freight charges or taxes included in that account. My preference is to charge the entire invoice to Office Supplies account because that would then contain the entire costs of my purchases for office supplies. Freight charges and taxes could be 15% (or more) of the purchase.

  • TraciKay

    What happens when the freight is shared? Who claims the inventory while in transit?

    • Andrea Wood

      Ownership of the inventory depends on FOB point. For example, if you ship inventory to your customer, FOB shipping point, the customer obtains ownership (and all associated risks) from the moment the inventory is picked up from your location. If FOB destination, you retain ownership of the inventory until your customer signs for it upon delivery to their premises. If FOB point is somewhere in between, ownership will transfer at that point.

      It is the same when you are receiving purchases from vendors. You will obtain ownership of the stock depending on FOB point.

      I hope this answers your questions!

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