What Does Freight In Mean in Accounting?

Freight-in refers to the costs a business incurs to bring acquired inventory into its possession. Understanding these expenses helps businesses accurately determine the true cost of their inventory and profitability.

Defining Freight-In

Freight-in encompasses the costs a business incurs to transport goods from a supplier to its own operational location, such as a warehouse or retail store. These expenses are directly associated with making purchased inventory available for use or sale. Typical costs included within freight-in are the actual shipping charges levied by carriers, insurance premiums protecting the goods during transit, and any handling fees charged by intermediaries for the inbound delivery process.

Freight-in can also include customs duties or import tariffs on goods entering the country. These costs are necessary to get the goods ready for their intended purpose. In contrast, freight-out refers to expenses incurred when shipping goods from a business to its customers, distinguishing inbound from outbound inventory movement.

Accounting for Freight-In

In accounting, freight-in costs are capitalized as part of the inventory’s total cost. This means these expenses are not immediately recognized as an operating expense on the income statement. Instead, they are added to the initial purchase price of the goods, forming a higher total cost for the inventory asset. This accounting treatment aligns with the principle that all costs incurred to bring an asset to its present location and condition for its intended use should be included in its cost.

By capitalizing freight-in, the business records these costs on the balance sheet as part of its inventory asset. For example, if a business purchases goods for $10,000 and incurs $500 in freight-in, the inventory’s recorded cost would be $10,500. This approach ensures that the inventory’s value reflects its true acquisition cost, encompassing all direct expenses to make it ready for sale. The freight-in component remains part of the inventory asset until the specific goods to which it relates are sold.

Financial Statement Impact

The capitalization of freight-in has direct effects on a business’s financial statements. On the balance sheet, the value of inventory is increased by the amount of capitalized freight-in, reflecting a more accurate valuation of the assets held. This higher inventory value impacts asset turnover ratios and other financial metrics that rely on inventory figures.

When inventory including capitalized freight-in is sold, these costs transition from the balance sheet to the income statement. The freight-in component becomes part of the Cost of Goods Sold (COGS). An increase in COGS due to capitalized freight-in directly reduces the gross profit reported by the business, leading to a lower net income. Accurate accounting for freight-in is important for financial reporting and decision-making.