the shipping and handling cost of goods or materials delivered to the company for resale or manufacturing.
In general, you'd incur a freight expense if you want goods transported from one place to another. But if you were the buyer, you'd pay freight-in. You may come across a freight-in shipping cost if you've signed a contract with Free On Board (FOB) shipping—when the buyer owns the shipped goods already—terms. Your business will then need to record the cost for transportation as an operating expense. The listing goes on the income statement in the operating expense account section.
You should include freight-in as a cost associated with inventory until you sell the goods. This manner of recording your transactions will enable you to postpone expense recognition.
Charging it to expense when it occurs will work to the best of your interests if the amount of freight-in is relatively small. It will reduce the time and amount of work involved in calculating the ending inventory balance freight cost. This could result, however, in charging more to expense upfront. A straight charge-off won't affect the inventory records and, again, will reduce the work.
Stella's Racing Bicycles sells and ships 100 high-quality bicycles to New York Sports Depot for $4,000. If $500 of the total cost represents the costs of shipping and Stella's used the US Generally Accepted Accounting Principles (GAAP), the manufacturer will choose between two options. The first one is reporting the $500 shipping as a separate obligation or shipping revenue. The other $3,500 is sales revenue and shipping costs. In the second case, Stella's would record Sales Revenue of $4,000 when the bicycles are shipped and $500 as a shipping expense at the time of shipping.
However, if the bicycles are shipped FOB, Stella's Racing Bicycles would treat the $500 shipping as an order fulfillment cost and record it as an expense when the goods are shipped. Then the seller would record $4,000 at the time New York Sports Depot receives the goods.
On the other hand, if you produce goods all year long, but only sell them during a busier season and if you were charging freight to expense all through the year, you'd have financial statements that have a small amount of cost of goods sold every month. There would be no sales, because sales only occur during the selling season. This can misrepresent the gross margin.
Freight-In vs. Freight-Out
Accountants have various ways of representing expenses on the company records. Generally, when shipping goods to a customer, businesses record the charges as an operating expense. When receiving goods, the charges are recorded in the cost of goods sold section.
If goods are sold FOB destination, the seller is responsible for paying the transportation expenses. The selling company sustains a cost called freight-out, records it as a selling expense, and subtracts it from gross profit when calculating net income.
If goods are sold FOB shipping point, the buyer is responsible for paying freight costs. The buyer company incurs a freight-in and adds it to purchases when calculating net income.
Significance of Freight-In
All consumers love when a merchant pays the shipping costs, but shipping charges bring both benefits and challenges. The terms parties agree on can have a significant impact on inventory operations.
Under the Generally Accepted Accounting Principles, a seller can choose if shipping costs will be an additional element of revenue or if they will be expensed at the time of shipping.