What Type of Account Is Freight In?

Businesses incur costs to operate and generate revenue. Understanding how these expenses are categorized is fundamental for assessing a company’s financial health. Accurate accounting clarifies spending, influencing strategic decisions and ensuring financial statements reflect operational efficiency and profitability.

Defining Freight-In

“Freight-in” refers to transportation costs a business incurs to bring purchased goods from a supplier to its own location. These costs are part of acquiring inventory and making it ready for sale or production. Freight-in encompasses charges for shipping, handling, insurance, and sometimes import duties associated with receiving these goods.

This cost is distinct from “freight-out,” which represents expenses for shipping goods from a business to its customers. Freight-out relates to delivery after a sale, while freight-in is an acquisition cost for bringing inventory into the business. Its purpose is to make products or materials available for sale or transformation.

Accounting for Freight-In

When accounting for freight-in, these costs are not treated as immediate expenses. Instead, they are capitalized, added directly to the inventory cost. This aligns with Generally Accepted Accounting Principles (GAAP), which states that all costs necessary to bring inventory to its current condition and location for sale should be included in the inventory cost.

This approach follows the historical cost principle, which dictates that assets are recorded at their original cost, including all expenditures required to acquire and prepare them for their intended use. For instance, if a business purchases 100 units at $10 each and incurs $50 in freight-in charges, the total cost becomes $1,050 ($1,000 for goods + $50 for freight), making the cost per unit $10.50. Freight-in is classified as an asset on the balance sheet, part of the inventory account, until goods are sold.

Freight-In on Financial Statements

Once freight-in costs are capitalized into inventory, their impact flows through a company’s financial statements. Initially, these costs increase the “Inventory” asset account on the Balance Sheet, reflecting the total cost of acquiring the goods and making the balance sheet a more accurate representation of assets.

The capitalized freight-in costs then affect the Income Statement when inventory is sold. At sale, the total inventory cost, including capitalized freight-in, transfers from the Balance Sheet to the “Cost of Goods Sold (COGS)” account on the Income Statement. This directly influences Gross Profit, determined by subtracting COGS from Sales Revenue. Changes in COGS, due to capitalized freight-in, also impact Net Income.

This accounting treatment aligns with the matching principle, a fundamental concept in accrual accounting. This principle requires expenses to be recognized in the same accounting period as the revenues they help generate. By including freight-in in COGS when the related goods are sold, the expense of acquiring those goods is matched with the revenue earned from their sale, providing a clearer picture of profitability for that period.