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