Freight In vs Freight Out: Definitions and Examples

Freight costs are a part of expenses for companies involved in shipping goods and transporting products to customers. Freight services encompass the various costs associated with shipping goods between suppliers and customers. You must understand the difference between freight in vs freight out, regardless of whether you work for a shipping company, a freight company, or any other business that functions similarly.

This article will provide an in-depth look at these concepts, including definitions, examples, and steps for recording these costs in your financial statements. By understanding the difference between freight in and freight out, you can accurately track your expenses, make informed decisions, and ultimately boost your business’s bottom line.

What is Freight In Transportation Costs?

Freight in describes the cost incurred by a business for shipping raw materials or goods into their storage facility or production. It is a direct expense incurred as part of the business’ daily operation and recorded as a debit in the inventory records. When a business needs to import items or raw materials to meet manufacturing demands, freight in can be relatively high. It is important to follow generally accepted accounting principles to ensure that these costs are accurately recorded and reported.

The cost of freight in is a portion of the cost of goods sold that include the cost of raw supplies, shipping fees, and other transportation-related costs. The shipping company will directly bill the freight charges, which will reflect as an operating expense in the business’ financial statement. Freight in must be accurately recorded in the correct period to ensure that the business’ financial statements accurately reflect the cost of goods sold.

How Do You Record Freight In?

Recording freight in is a necessary step to manage your spending and keep track of the cost of goods sold. The steps to record freight are as follows:

1. Determine the freight charge amount: This should cover all expenses, such as shipping, handling, and other supplemental costs incurred in bringing raw materials to the business.
2. Debit the inventory account: The freight charge should be deducted from the inventory account to reflect the cost of the received raw materials.
3. Credit the cash or accounts payable account: The freight charge, which represents the payment paid to the shipping business, should be credited to the cash or accounts payable account.
4. Update the inventory records: An updated inventory record is essential to reflect the price of the raw materials received, including the freight charge.
5. Record the freight charge on the financial statements: The freight charge needs to be listed as a direct cost under the cost of goods sold on the income statement. It should also appear as a decrease in the inventory account on the balance sheet.

What is Freight Out Operating Expense?

Freight out is the expense incurred by a business to send finished goods to customers. The sales department is responsible for paying this operating charge, commonly reflected as a credit in the inventory records. The freight out cost is a direct freight expense that the company incurs regularly and is typically expressed as a percentage of product sales. Adhering to generally accepted accounting principles ensures that these expenses are consistently and accurately recorded.

The freight out cost can vary greatly depending on the type of goods shipped, the shipping company or courier used, and the shipment’s destination. Freight out is typically billed by the shipping company and is reflected in the company’s financial statements as a selling expense.

To accurately record freight out, it is crucial to understand the FOB (Free on Board) shipping point or FOB destination concept, which determines when ownership of the goods is transferred from the seller to the buyer.

How Do You Record Freight Out?

The process of precisely documenting the freight cost incurred by your company includes recording freight out. The steps to record freight out are as follows:

1. Determine the freight charge amount: This should cover all expenses related to getting final products to clients, such as shipping, handling, and other ancillary fees.
2. Credit the inventory account: The freight charge must be applied to the inventory account to reflect the cost of the completed items sold.
3. Debit the cash or accounts receivable account: The freight charge should be deducted from the cash or accounts receivable account since it represents the client’s payment.
4. Update the inventory records: The cost of the finished goods sold, including the freight charge, should be updated in the inventory records.
5. Record the freight charge on the financial statements: The freight charge must be shown as a selling expense on the income statement. If the customer has not yet paid the freight charges, it should be shown on the balance sheet as an increase in accounts receivable.

Examples of Calculating Freight Out

Let’s say a company has sold $10,000 of finished goods to a customer, and the freight charge to ship the goods is $500. The accountant would credit the inventory account with $500 to reflect the cost of the finished goods sold and credit cash to account for the outflow of funds for the freight out. The $500 would then be deducted from the cash or accounts receivable account by the accountant as it represents the customer payment.

The cost of the finished goods sold, including the $500 freight fee, would be reflected in the inventory records after they have been updated. The $500 freight charge would then be shown as a selling expense on the income statement by the accountant. If the customer has not yet made payment for the freight charges, it would also appear on the balance sheet as an increase in accounts receivable.

Key Differences Between Freight In and Freight Out

Freight in and freight out are two distinct concepts in logistics and accounting that are often confused with each other. Understanding the key differences between them is crucial for businesses to accurately track their expenses, make informed decisions, and optimize their shipping costs.

1. Direction of Transport: Freight in refers to the cost of shipping raw materials or goods into a business’s storage facility or production area. In contrast, freight out refers to the cost of shipping finished goods to customers. This fundamental difference in direction is the primary distinction between the two.
2. Responsibility: Typically, the buyer is responsible for freight in costs, covering the transportation costs to bring raw materials into their facility. On the other hand, the seller usually bears the freight out costs, which include the expenses of delivering finished goods to the customer. However, these responsibilities can vary based on the terms specified in the sales contract.
3. Accounting Treatment: In accounting, freight in is considered a direct cost and is added to the cost of goods sold. This means it directly impacts the inventory value on the balance sheet. Conversely, freight out is categorized as a selling expense and is recorded separately on the income statement, affecting the company’s profit margin.
4. Impact on Financial Statements: Freight in increases the value of inventory on the balance sheet, reflecting the cost of acquiring raw materials. Freight out, however, appears on the income statement as a selling expense, reducing the company’s profit margin. This distinction is crucial for accurate financial reporting and analysis.
5. Incoterms: The terms of trade, known as Incoterms, play a significant role in determining the responsibility for transportation costs and risks between the buyer and seller. These terms help clarify whether the cost is classified as freight in or freight out, ensuring both parties understand their obligations.

By understanding these key differences, businesses can better manage their transportation costs, accurately record expenses, and make informed decisions that enhance their financial performance.

Freight Costs and Transportation Costs

Freight costs and transportation costs are closely related but distinct concepts in logistics and accounting. Understanding the relationship between them is essential for businesses to optimize their shipping costs and make informed decisions.

1. Freight Costs: Freight costs refer specifically to the expenses incurred by a business to transport goods. This includes both freight in costs, which are the expenses of bringing raw materials into the business, and freight out costs, which are the expenses of shipping finished goods to customers. These costs are a critical component of a company’s overall transportation expenses.
2. Transportation Costs: Transportation costs encompass a broader category of expenses associated with moving goods. In addition to freight costs, transportation costs include fuel expenses, labor costs, vehicle maintenance, and other related expenses. This broader category reflects the total cost of logistics and transportation operations.
3. Relationship: Freight costs are a subset of transportation costs. While transportation costs cover all expenses related to the movement of goods, freight costs specifically refer to the shipping expenses. Understanding this relationship helps businesses allocate and manage their logistics budget more effectively.
4. Impact on Business: Both freight costs and transportation costs can significantly impact a business’s bottom line. High transportation costs can reduce profit margins, affect cash flow, and influence pricing strategies. Therefore, managing these costs is crucial for maintaining competitiveness and profitability.
5. Optimization: Optimizing both freight costs and transportation costs is essential for businesses looking to reduce expenses and improve efficiency. This can involve negotiating better rates with freight companies, optimizing shipping routes, and investing in more efficient transportation methods. By doing so, businesses can enhance their competitiveness and overall performance in the market.

By understanding the key differences between freight in and freight out, as well as the relationship between freight costs and transportation costs, businesses can make informed decisions, optimize their shipping costs, and improve their overall performance.

FAQs

There are often inquiries made regarding freight costs. These questions often revolve around the costs and categorization of freight services. We’ll answer some of the most frequently asked questions about freight in and freight out.

Who pays the freight in freight out?

Depending on the conditions set forth by the buyer and seller, one party may be responsible for paying the freight in or out. The buyer often covers freight out, whereas the seller typically covers freight in. Nevertheless, depending on the particulars of each transaction, this may change. Understanding who is responsible for these freight services is crucial for accurate financial planning.

How do you know if it is freight in or freight out?

Freight in refers to the cost of transporting raw materials to the business, while freight out refers to the cost of shipping finished goods to customers. You should consider the direction of the goods and the person paying the transportation costs when determining whether a cost is a freight in or freight out. Properly categorizing these freight services ensures accurate financial reporting.

Wrapping Up Freight In vs Freight Out

Understanding the difference between freight in and out is crucial to evaluating a company’s financial situation. Businesses can enhance their bottom line by measuring and recording freight costs effectively and making educated decisions regarding their shipping prices.

This article has shown what freight in and freight out are, how to record these expenses, and provided examples of how to calculate them. Whether you are an accountant, business owner, or anyone involved in managing a business’s finances, it is essential to understand these concepts and how they impact your financial statements. Adhering to generally accepted accounting principles is essential for accurate financial reporting and decision-making.