Freight In Is What Type of Account?

“Freight in” refers to the costs a business incurs to bring purchased goods or materials into its possession. Understanding its accounting classification is important for accurate financial reporting, as these costs impact a company’s financial statements. Correctly categorizing “freight in” ensures businesses can measure profitability and the true cost of their inventory.

Understanding Freight In

“Freight in” refers to the costs of transporting purchased goods from a supplier to a business’s location, such as a warehouse or retail store. These expenses can include shipping fees, customs duties, insurance during transit, and handling charges at ports or receiving facilities. For example, if a manufacturer buys raw materials from an overseas supplier, the cost to ship those materials to the manufacturing plant is considered freight in.

This freight expense is incurred to make purchased goods ready for sale or use in production. It is distinct from “freight out,” which represents the costs a business incurs to ship goods to its customers after a sale.

Accounting for Freight In

“Freight in” is not an immediate expense. Instead, it is considered a cost of acquiring inventory and is “capitalized,” meaning it is added to the cost of the inventory itself. This accounting treatment aligns with generally accepted accounting principles (GAAP), which require that all costs necessary to bring an asset to its intended condition and location for sale should be included in its cost.

The rationale for capitalizing freight in is that inventory is not complete or ready for its intended use until it arrives at the company’s premises. Therefore, the transportation cost is an integral part of the inventory’s total value. For example, if a company purchases an item for $100 and incurs $10 in freight in costs, the inventory’s recorded cost becomes $110. This $110 then resides as an asset within the “Inventory” account on the Balance Sheet. The IRS also allows freight in as part of inventory costs for tax purposes.

Impact on Financial Statements

The capitalization of “freight in” directly impacts a company’s primary financial statements, particularly the Balance Sheet and the Income Statement. On the Balance Sheet, “freight in” increases the value of the “Inventory” asset account. This increased inventory value remains on the Balance Sheet until the goods are sold to a customer.

When the inventory is finally sold, its total cost is moved from the Balance Sheet to the Income Statement. It becomes part of the “Cost of Goods Sold” (COGS). Including “freight in” in COGS directly influences the gross profit and the net income reported by the business. In contrast, “freight out” is recorded as an operating expense, such as a selling or distribution expense, appearing separately on the Income Statement and not as part of COGS.