Why Is Freight In a Debit, Not a Credit?

In accounting, every financial transaction is recorded using debits and credits. Debits are entered on the left side of an accounting entry, while credits are placed on the right, affecting various account types. Understanding these principles is essential for accurate financial records. “Freight in” is a cost that often confuses new accountants regarding its proper classification.

Understanding Freight In

“Freight in” refers to expenses for transporting purchased goods from a supplier to the buyer’s location. These costs are an integral part of acquiring inventory and preparing it for use or sale. This differs from “freight out,” which covers shipping goods from the seller to the customer and is typically a selling expense. Including freight in with inventory costs ensures all acquisition expenses are matched with the revenue they generate. These costs can include carrier fees, handling surcharges, and transit insurance premiums.

Why Freight In is a Debit

“Freight in” is recorded as a debit because it increases a business’s assets or expenses. This aligns with accounting rules, where an increase in an asset or expense account is a debit. When a company incurs freight in costs, these expenses either directly increase inventory value (an asset) or are recognized as a direct expense.

For example, if a business buys raw materials for $10,000 and pays $400 for freight, the total cost becomes $10,400. This $400 freight is debited to the inventory account or a specific expense account. This is often called the “landed cost” of inventory, representing the total cost to bring a product to the buyer’s facility. Debiting freight in ensures accurate inventory valuation on the balance sheet and correct Cost of Goods Sold on the income statement.

Recording Freight In Transactions

Recording freight in involves specific journal entries based on the inventory accounting method. Under a perpetual inventory system, freight in costs directly increase the inventory’s asset value. A typical entry debits “Inventory” (or “Merchandise Inventory”) and credits “Cash” or “Accounts Payable,” capitalizing the transportation cost.

For businesses using a periodic inventory system, or when freight is a separate operating cost for non-inventory items, freight in is often debited to an expense account. A common entry debits “Freight In Expense” or “Transportation In Expense” and credits “Cash” or “Accounts Payable.” The credit side reflects the payment method, whether cash or a liability if on credit. Regardless, freight in always results in a debit to an asset or expense account.

Impact on Financial Statements

The accounting treatment of freight in directly influences a company’s financial statements. On the income statement, freight in contributes to the Cost of Goods Sold (COGS). If capitalized into inventory, it becomes part of COGS when the inventory is sold. If expensed directly, it immediately impacts COGS or another operating expense. Higher freight in costs increase COGS, reducing gross profit and net income.

For the balance sheet, if freight in is capitalized under a perpetual inventory system, it increases the “Inventory” asset account. This asset value remains on the balance sheet until the goods are sold, then transferring to COGS. Proper classification and recording of freight in are essential for accurate inventory values and profitability metrics.