What Is Freight-In and Its Impact on Inventory Cost?

Freight-in represents the expenses incurred to bring purchased goods into a business’s possession. These costs are a direct part of acquiring inventory and impact how inventory is valued and reported. Understanding how these costs are handled is important for accurate financial reporting.

Understanding Freight-In

Freight-in encompasses various costs associated with transporting goods from a supplier to a buyer’s location. This includes shipping charges, delivery fees, and insurance costs incurred during transit for purchased inventory. These costs are borne by the buyer to acquire goods and are directly tied to getting inventory ready for sale or use.

Freight-out refers to the costs a seller incurs to deliver goods to customers. Unlike freight-out, which is a selling expense, freight-in costs are direct costs related to inventory acquisition. The buyer incurs these costs to bring materials or finished goods into their warehouse or production facility.

Impact on Inventory Cost

Freight-in costs directly affect the valuation of inventory. GAAP requires all costs necessary to bring inventory to its existing condition and location for sale to be included in its cost. This means freight-in expenses are “capitalized,” or added to the cost of the inventory itself, rather than being immediately expensed.

Including freight-in increases the per-unit cost of inventory. For example, if a company purchases 100 units for $1,000 and incurs $50 in freight-in, the total cost becomes $1,050, making the per-unit cost $10.50 instead of $10.00. These costs are recognized as an expense only when the inventory is sold as part of the Cost of Goods Sold (COGS), aligning expenses with revenue and providing a clearer picture of profitability.

Recording Freight-In

The accounting treatment of freight-in varies depending on the inventory system used. When a business uses a perpetual inventory system, freight-in costs are directly debited to the Inventory account. This increases the inventory’s asset value on the balance sheet, with a corresponding credit to Cash or Accounts Payable. This ensures the inventory account continuously reflects the updated cost.

In a periodic inventory system, freight-in costs are recorded in a separate temporary account, such as “Freight-In.” This account is then closed out at the end of the accounting period, and its balance is included in the Cost of Goods Sold calculation. Both systems ensure that freight-in costs become part of the Cost of Goods Sold when the related inventory is sold.