What Is Freight In and Freight Out?

Freight costs are expenses incurred when goods are transported, playing a significant role in a business’s financial health. These charges impact operations from acquiring raw materials to delivering finished products. Accurately tracking and classifying these costs is crucial for financial reporting and informed business decisions. Understanding how these expenses are accounted for helps businesses manage profitability and evaluate operational efficiency.

Understanding Freight In

Freight In refers to costs a business incurs to bring purchased goods, such as raw materials or merchandise inventory, to its own location. This includes shipping fees, handling charges, and other expenses tied to inbound movement.

For accounting, these costs are capitalized, meaning they are added to the inventory’s cost on the balance sheet. This treatment ensures the total cost of acquiring inventory, including its transport, is accurately reflected.

When the inventory is sold, capitalized Freight In becomes part of the Cost of Goods Sold (COGS) on the income statement. For instance, a furniture manufacturer paying shipping fees for lumber or a retailer receiving products from a distributor would include these as Freight In. This approach aligns the expense with revenue from the related goods.

Understanding Freight Out

Freight Out represents costs a business incurs to deliver goods from its location to its customers. These expenses arise when a company ships finished products to a distributor, another business, or the end consumer.

Unlike Freight In, these costs are treated as operating expenses on the income statement. They are often classified under selling or distribution expenses. These expenses are not capitalized into inventory because they occur after goods are ready for sale.

For example, an online retailer pays for shipping a customer’s order, or a wholesaler covers transport to retail outlets. These costs are expensed when incurred, directly reducing the company’s net income.

Impact on Financial Statements

The distinct accounting treatment of Freight In and Freight Out impacts a company’s financial statements. Freight In costs, capitalized into inventory, directly influence the value of inventory reported on the balance sheet.

When the related inventory is sold, these costs flow into the Cost of Goods Sold (COGS) on the income statement, directly affecting the company’s gross profit. An increase in Freight In, therefore, leads to a higher COGS and a lower gross profit margin, assuming sales prices remain constant.

In contrast, Freight Out costs are recorded as operating expenses on the income statement. This means they reduce a company’s net income but do not directly impact the Cost of Goods Sold or gross profit.

For financial analysis, this distinction is crucial; it allows analysts to differentiate between costs tied to product acquisition and those related to selling and distribution. Evaluating gross profit margin provides insight into a company’s pricing strategy and production efficiency, while operating profit margin reflects the effectiveness of overall business operations, including selling and administrative efforts.