Freight In vs Freight Out: Definitions and Examples
Freight costs are a part of expenses for companies involved in shipping goods and transporting products to customers. You must understand the difference between freight in vs freight out, regardless of whether you work for a shipping company, a freight company, or any other business that functions similarly.
This article will provide an in-depth look at these concepts, including definitions, examples, and steps for recording these costs in your financial statements. By understanding the difference between freight in and freight out, you can accurately track your expenses, make informed decisions, and ultimately boost your business’s bottom line.
What is Freight In?
Freight in describes the cost incurred by a business for shipping raw materials or goods into their storage facility or production. It is a direct expense incurred as part of the business’ daily operation and recorded as a debit in the inventory records. When a business needs to import items or raw materials to meet manufacturing demands, freight in can be relatively high.
The cost of freight in is a portion of the cost of goods sold that include the cost of raw supplies, shipping fees, and other transportation-related costs. The shipping company will directly bill the freight charges, which will reflect as an operating expense in the business’ financial statement. Freight in must be accurately recorded in the correct period to ensure that the business’ financial statements accurately reflect the cost of goods sold.
How Do You Record Freight In?
Recording freight in is a necessary step to manage your spending and keep track of the cost of goods sold. The steps to record freight are as follows:
- Determine the freight charge amount: This should cover all expenses, such as shipping, handling, and other supplemental costs incurred in bringing raw materials to the business.
- Debit the inventory account: The freight charge should be deducted from the inventory account to reflect the cost of the received raw materials.
- Credit the cash or accounts payable account: The freight charge, which represents the payment paid to the shipping business, should be credited to the cash or accounts payable account.
- Update the inventory records: An updated inventory record is essential to reflect the price of the raw materials received, including the freight charge.
- Record the freight charge on the financial statements: The freight charge needs to be listed as a direct cost under the cost of goods sold on the income statement. It should also appear as a decrease in the inventory account on the balance sheet.
What is Freight Out?
Freight out is the expense incurred by a business to send finished goods to customers. The sales department is responsible for paying this operating charge, commonly reflected as a credit in the inventory records. The freight out cost is a direct freight expense that the company incurs regularly and is typically expressed as a percentage of product sales.
The freight out cost can vary greatly depending on the type of goods shipped, the shipping company used, and the shipment’s destination. Freight out is typically billed by the shipping company and is reflected in the company’s financial statements as a selling expense.
To accurately record freight out, it is crucial to understand the FOB (Free on Board) shipping point or FOB destination concept, which determines when ownership of the goods is transferred from the seller to the buyer.
How Do You Record Freight Out?
The process of precisely documenting the freight cost incurred by your company includes recording freight out. The steps to record freight out are as follows:
- Determine the freight charge amount: This should cover all expenses related to getting final products to clients, such as shipping, handling, and other ancillary fees.
- Credit the inventory account: The freight charge must be applied to the inventory account to reflect the cost of the completed items sold.
- Debit the cash or accounts receivable account: The freight charge should be deducted from the cash or accounts receivable account since it represents the client’s payment.
- Update the inventory records: The cost of the finished goods sold, including the freight charge, should be updated in the inventory records.
- Record the freight charge on the financial statements: The freight charge must be shown as a selling expense on the income statement. If the customer has not yet paid the freight charges, it should be shown on the balance sheet as an increase in accounts receivable.
Examples of Calculating Freight Out
Let’s say a company has sold $10,000 of finished goods to a customer, and the freight charge to ship the goods is $500. The accountant would credit the inventory account with $500 to reflect the cost of the finished goods sold to determine the freight out. The $500 would then be deducted from the cash or accounts receivable account by the accountant as it represents the customer payment.
The cost of the finished goods sold, including the $500 freight fee, would be reflected in the inventory records after they have been updated. The $500 freight charge would then be shown as a selling expense on the income statement by the accountant. If the customer has not yet made payment for the freight charges, it would also appear on the balance sheet as an increase in accounts receivable.
There are often inquiries made regarding freight costs. We’ll answer some of the most frequently asked questions about freight in and freight out.
Who pays the freight in freight out?
Depending on the conditions set forth by the buyer and seller, one party may be responsible for paying the freight in or out. The buyer often covers freight out, whereas the seller typically covers freight in. Nevertheless, depending on the particulars of each transaction, this may change.
How do you know if it is freight in or freight out?
Freight in refers to the cost of transporting raw materials to the business, while freight out refers to the cost of shipping finished goods to customers. You should consider the direction of the goods and the person paying the transportation costs when determining whether a cost is a freight in or freight out.
Wrapping Up Freight In vs Freight Out
Understanding the difference between freight in and out is crucial to evaluating a company’s financial situation. Businesses can enhance their bottom line by measuring and recording freight costs effectively and making educated decisions regarding their shipping prices.
This article has shown what freight in and freight out are, how to record these expenses, and provided examples of how to calculate them. Whether you are an accountant, business owner, or anyone involved in managing a business’s finances, it is essential to understand these concepts and how they impact your financial statements.