What Is Freight In Accounting and How to Report It

Freight in accounting refers to the costs associated with transporting goods a business purchases from a supplier to its own location. These transportation expenses are directly linked to acquiring inventory. Proper accounting for freight in is important for accurately determining the true cost of inventory and ensuring financial statements reflect a complete picture of asset valuation.

Understanding Freight In

Freight in encompasses all direct costs incurred to bring purchased inventory to the buyer’s premises and make it ready for sale or use. These expenses typically include the actual shipping charges paid to carriers, such as trucking companies or freight forwarders. Handling fees imposed by the supplier or third-party logistics providers for preparing and loading the goods for shipment also fall under this category.

Insurance premiums paid to protect the goods against loss or damage during transit are another component of freight in. For businesses importing goods from international suppliers, customs duties and tariffs levied by government authorities upon entry into the country are also included. These costs are incurred because the goods are not considered fully acquired and available until they arrive at the buyer’s location in a condition suitable for their intended purpose.

Recording Freight In

Freight in is typically treated as a direct cost of the inventory purchased, rather than an immediate operating expense. This means the freight costs are “capitalized” into the inventory account, increasing the total recorded value of the goods. For example, if a business purchases $10,000 worth of goods and incurs $500 in freight charges, the inventory would be recorded at $10,500. This aligns with accounting principles that require all costs necessary to bring an asset to its intended use or location to be included in its cost.

When freight costs are incurred, the accounting entry involves debiting the Inventory account and crediting Cash or Accounts Payable. This action increases the asset value on the balance sheet. When the inventory is subsequently sold, the capitalized freight cost then moves from the Inventory account to the Cost of Goods Sold (COGS) account, reflecting the full cost of the inventory that has left the business. While companies generally capitalize freight in, an immediate expense may occur if the amount is immaterial, avoiding a complex allocation process for negligible costs.

Impact on Financial Reporting

The proper accounting for freight in directly influences several key financial statement figures. By adding freight costs to the inventory’s value, the Cost of Goods Sold (COGS) increases when that inventory is eventually sold.

The increase in COGS has a direct inverse effect on a company’s gross profit. Gross profit, calculated as sales revenue minus COGS, will decrease as freight in increases COGS. Furthermore, capitalizing freight in contributes to the total value of inventory reported on the balance sheet until the goods are sold.