Freight can be a significant business expense. Managers need to understand accounting for freight charges in order to make accurate financial projections and ongoing business decisions. Whether the seller or the buyer pays freight charges determines how freight charges are recorded in accounting.
Accounting for freight charges is a specific classification in a business's record books. And, for many companies who ship goods on a regular basis, freight can be a significant expense over the course of the year. Knowing how to handle freight charges can improve a business’s bottom line. Managers need to know how to record freight charges in accounting to make accurate financial projections and ongoing business decisions.
Differences In Accounting for Freight and Other Business Expenses
Freight charges can be handled in much the same way as other general business expenses. However, there are two significant differences between freight charges and other business expenses. Unlike most business expenses, freight charges can either be paid by the person shipping out the goods or by the person receiving the goods. Furthermore, freight charges are only incurred as goods are sent out. Another factor complicating matters is that if freight is part of the cost of an asset, it must be recorded and included in the asset’s overall value.
FOB Shipping Versus FOB Destination
Accountants typically label the charges as either FOB shipping point or FOB destination. FOB stands for “freight on board.” FOB shipping point requires the buyer to pay freight charges. FOB destination means the seller must pay the charges for shipping the assets. In other words, when you are shipping freight to your customers, the cost of making that delivery is an expense that comes out of your ledger as a debit. This is considered a selling expense and is known as freight-out. When you make a purchase and the supplier bills you for shipping, that is referred to as freight-in. That debit comes out of a “cost of sales-freight” account.
Recording Freight Charges in Accounting
To learn how to record freight charges in accounting, first determine the classification for the freight charges. Is the buyer or the seller paying freight charges? For FOB shipping point, the sale occurred at the shipping point – meaning your company’s dock. FOB destination means that the sale will occur when it arrives at the destination – at the buyer's receiving dock.
If the freight classification is FOB shipping point, the buyer takes responsibility for the cost of transporting the goods. To the buyer, this is a freight-in or transportation-in cost.
If the freight classification is FOB destination, then the seller records the transportation cost as freight-out, transportation-out or delivery expense. If there is no entry in the ledge for this expense, create one. FOB destination requires a debit to freight-in and a credit to accounts payable. Sellers – who pay freight under FOB shipping point – debit delivery expense while crediting accounts payable.