Companies use a variety of assets in the operation of their businesses. Current assets represent assets that consist of cash, will be converted to cash within one year or will expire within one year, such as accounts receivable or prepaid insurance. Intangible assets represent assets with no physical form that the company benefits from, such as copyrights or patents. Capital assets represent large physical assets used in the business.
Freight expense consists of the cost incurred to ship an item from one location to another. Companies incur freight expenses when purchasing materials, production supplies or capital assets. Companies incur freight expenses in three different ways. In some cases, the seller arranges the delivery of the item and pays for the freight charges. In other cases, the seller arranges the delivery of the item, pays for the freight charges and bills the company for the expense. And in other cases, the company arranges the freight and pays the freight company directly.
Capital Asset Definition
A capital asset consists of any large asset purchased and placed in service by the company. Examples of capital assets include work vehicles or production equipment. Companies analyze the cost of capital assets prior to purchasing the asset to determine whether the financial benefits provided by the capital asset will surpass the cost of acquiring the asset. The total cost of a capital asset consists of the purchase price of the asset, any installation charges and freight expenses incurred.
Freight Incurred Before Placing Asset In Service
When the company receives the capital asset at its facility, it focuses on the activities necessary to place the capital asset in service. These activities include the installation and setup charges incurred. These activities also include the freight expense incurred with the delivery of the capital assets. When the company needs additional mechanical parts to install or set up the asset, the freight charges incurred on these parts are also included as part of the capital asset. The company records these freight expenses by recording a journal entry debiting the capital asset account and crediting cash.
Freight Incurred After Placing Asset In Service
Not all freight charges incurred by the company qualify as part of the cost of the capital asset. After the capital asset is placed in service and used in the business operation, any expenses incurred in the upkeep of the asset become a repair and maintenance expense. Freight charges incurred to receive delivery of mechanical parts become a maintenance expense. The company records these freight expenses by recording a journal entry debiting repairs and maintenance expense and crediting cash.