Freight costs paid by a company on the merchandise it sells to customers is
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The key difference to understand is that freight-in is incurred to ship materials to the company’s production facility. Freight-in is part of the production process and will be capitalized into inventory and expensed through cost of goods sold when the product is sold. Freight-in is the cost incurred to ship finished goods to a distributor or retailer. Freight-out is considered a selling expense and is expensed when incurred. Show
 If you are studying for the CPA exam, then sign up for a free trial to have full access to the Universal CPA platform for 7 days here. Universal CPA is the only course that has visual learning and bite-sized video explanations for every single MCQ and simulation. To learn more about the Universal CPA course and see a demo of the course, visit this link. Previous Question Next Question Back To All Questions Cost of goods sold doesn’t have a strict definition, but would generally include any cost incurred to produce a good or deliver a service. Another way to think about a cost of goods sold is whether or not you would incur that cost if you stopped selling a good or service. Cost of goods sold... Read More Freight-out is considered a selling expense and is expensed when incurred. When a company hires a 3rd party transportation company to transport inventory to a customer, the company would debit freight-out expense (selling expense) and credit cash (cash outflow to pay shipping company). Alternatively, the credit would be to accounts payable if they paid on... Read More Freight-in is capitalized onto the balance sheet since it’s considered a production cost. Therefore, when freight-in is incurred, the company would debit inventory (freight-in) and credit cash (cash outflow to pay the expense). Freight-in only flows through cost of goods sold when inventory is sold and revenue is recognized. \( \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \) \( \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} \)\(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\) \(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\)\(\newcommand{\AA}{\unicode[.8,0]{x212B}}\) Merchandise often must be delivered from the seller to the buyer. It is important to know which company - either the seller or the purchaser - owns the merchandise while it is in transit and in the hands of a third-party transportation company, such as UPS. The company that owns the merchandise must absorb the transportation cost as a business expense. The shipping terms specify which company owns the merchandise while in transit. Terms may be FOB destination or FOB shipping. The acronym FOB stands for “Free On Board” and is a shipping term used in retail to indicate who is responsible for paying transportation charges. It is also the location where ownership of the merchandise transfers from seller to buyer. If the shipping terms are FOB destination, ownership transfers at the destination, so the seller owns the merchandise all the while it in transit. Therefore, the seller absorbs the transportation cost and debits Delivery Expense. The buyer records nothing. If the terms are FOB shipping, ownership transfers at the origin as it leaves the seller’s facility, so the buyer owns the merchandise all the while it is in transit. The buyer therefore absorbs the transportation cost and debits Merchandise Inventory; the transportation charges just become part of the purchase price of the inventory. In the case of FOB shipping, the buyer may contract directly with the transportation company (and the seller records nothing) OR the seller may pre-pay the shipping costs and pass them along in the invoice to the buyer. There are three possible scenarios regarding transportation, as follows: 1. Terms are FOB destination The seller calls UPS to pick up the shipment from his loading dock. The seller is billed by UPS and ultimately pays the bill and absorbs the expense. BUYER SELLER 11. Purchase 50 items on account for $10 each, terms FOB destination. Transportation charges are $20 on account. 12. Sell 50 items on account for $10 each, terms FOB destination. Each item cost $4. Transportation charges are $20 on account. Date Account Debit Credit Date Account Debit Credit 11 Merchandise Inventory 500 12 Accounts Receivable 500 Accounts Payable 500 Sales 500 Date Account Debit Credit 12 Cost of Merchandise Sold 200 Merchandise Inventory 200 Date Account Debit Credit 12 Delivery Expense 20 Accounts Payable 20 The seller uses Delivery Expense to record transpor- tation charges only when terms are FOB destination. NOTE: If the information about the transportation says the seller is billed or invoiced by UPS, credit Accounts Payable (as shown above.) If the informa- tion says the buyer paid UPS, credit Cash instead. 11. You pay the amount invoiced at the time of the purchase. 11. Your customer pays you the amount invoiced for the sale. Account Debit Credit Debit ▼ Accounts Payable 500 ▲ Cash 500▼ Cash 500 ▼ Accounts Receivable 500 2. Terms are FOB shipping The purchaser calls UPS to pick up the shipment from the seller’s loading dock. The purchaser is billed by UPS. Since the buyer is dealing with two different parties – the seller and the transportation company, the buyer records two journal entries. BUYER SELLER13. Purchase 50 items on account for $10 each, terms FOB shipping. Transportation charges are $20 on account. 14. Sell 50 items on account for $10 each, terms FOB shipping. Each item cost $4. Transportation charges are $20 on account. Date Account Debit Credit Date Account Debit Credit 13 Merchandise Inventory 500 14 Accounts Receivable 500 Accounts Payable 500 Sales 500 Receive an invoice from UPS for the shipping. Date Account Debit Credit Date Account Debit Credit 13 Merchandise Inventory 20 14 Cost of Merchandise Sold 200 Accounts Payable 20 Merchandise Inventory 200 The purchaser uses Merchandise Inventory to record transportation charges when terms are FOB shipping. Shipping becomes part of the cost of the merchandise. The first Accounts Payable is to the seller; the second one is to the shipping company. The seller does not record transportation charges at all since terms are FOB shipping. NOTE: If the information about the transportation says the buyer is billed or invoiced by UPS, credit Accounts Payable (as shown above.) If the informa- tion says the buyer paid UPS, credit Cash instead. 11. You pay the amount invoiced to the vendor. (You do not pay the UPS invoice yet.) 11. Your customer pays you the amount invoiced for the sale. Assume payment terms are 2/10, net 30 under the gross method. Account Debit Credit Account Debit Credit ▼ Accounts Payable 500 ▲ Cash 500 ▼ Cash 490 ▲ Sales Discounts 10 ▼ Merchandise Inventory 10 ▼ Accounts Receivable 500
BUYER SELLER 15. Purchase 50 items on account for $10 each, terms FOB shipping. Transportation charges are $20 on account. 16. Sell 50 items on account for $10 each, terms FOB shipping. Each item cost $4. Transportation charges are $20 on account. Date Account Debit Credit Date AccountDebit Credit 15 Merchandise Inventory 520 16 Accounts Receivable 520 Accounts Payable 520 Sales 500 The purchaser includes the shipping cost as part of the inventory cost and pays the seller not only the cost of the merchandise, but also reimbursement for the transportation charges. Date Account Debit Credit 16 Cost of Merchandise Sold 200 Merchandise Inventory 200 The seller is owed the cost of the merchandise and the cost of the transportation. However, the seller owes those transportation charges of $20 to the shipping company. Notice above that the buyer can combine the merchandise and transportation costs into one journal entry because the buyer is getting one invoice for both from the seller. Also notice that the seller can combine both the sale and the transportation added into one journal entry and send one invoice. Also notice that the transportation cost pre-paid by the seller does not become part of the Sales account. The following transactions are ALTERNATIVE ways of presenting those above, splitting both the buyer’s and the seller’s transaction into two journal entries. BUYER SELLER 15. Purchase 50 items on account for $10 each, terms FOB shipping. Transportation charges are $20 on account. 16. Sell 50 items on account for $10 each, terms FOB shipping. Transportation charges are $20 on account. Date Account Debit Credit Date Account Debit Credit 15 Merchandise Inventory 500 16 Accounts Receivable 500 Accounts Payable 500 Sales 500 Date Account Debit Credit Date Account Debit Credit 15 Merchandise Inventory 20 16 Accounts Receivable 20 Accounts Payable 20 Accounts Payable 20 The purchaser includes the shipping cost as part of the inventory cost and pays the seller not only the cost of the merchandise, but also reimbursement for the transportation charges. Date Account Debit Credit 16 Cost of Merchandise Sold 200 Merchandise Inventory 200 The seller is owed the cost of the merchandise and the cost of the transportation. However, the seller owes those transportation charges of $20 to the shipping company. Regardless of which alternative was used to record the purchase and to record the sale, the following transactions record payment to the vendor when purchasing and payment by the customer when selling. 11. You pay the amount invoiced to the vendor. 11. Your customer pays you the amount invoiced for the sale. Assume payment terms are 2/10, net 30 under the gross method. Account Debit Credit Account Debit Credit ▼ Accounts Payable 520 ▲ Cash 510 ▼ Cash 510 ▲ Sales Discounts 10 ▼ Merchandise Inventory 10 ▼ Accounts Receivable 510 (500 – (500 x .02)) + 20 = 510 (500 – (500 x .02)) + 20 = 510 Important: When a purchases or sales discount is involved, be sure to only take the discount on the merchandise cost or sales price, respectively, and not on the transportation cost. Accounts Summary Table - The following table defines and summarizes the new accounts for a merchandising business. ACCOUNTS SUMMARY TABLEACCOUNT TYPE ACCOUNTS TO INCREASE TO DECREASE NORMAL BALANCE FINANCIAL STATEMENT CLOSE OUT? Asset (*temporary) Merchandise Inventory Purchases * Freight-in * debit credit debit Balance NO Contra Asset (*temporary) Purchases Returns * Purchases Discounts * credit debit credit Balance Sheet NO This page titled 3.4: Transportation Costs for Merchandising Transactions is shared under a CC BY-SA 4.0 license and was authored, remixed, and/or curated by Christine Jonick (GALILEO Open Learning Materials) via source content that was edited to the style and standards of the LibreTexts platform; a detailed edit history is available upon request. What is freight in cost of sales?Freight-in is part of the production process and will be capitalized into inventory and expensed through cost of goods sold when the product is sold. Freight-in is the cost incurred to ship finished goods to a distributor or retailer. Freight-out is considered a selling expense and is expensed when incurred.
Is freight to customers cost of goods sold?The cost of shipping to the customer is also not included in COGS. The Internal Revenue Service (IRS) allows companies to deduct the COGS for any products they either manufacture themselves or purchase with the intent to resell.
What type of cost is freight?Freight costs are also known as freight charges or freight rates. It is the amount paid to a carrier company for the transportation of goods from the point of origin to an agreed location.
Are freight costs paid by the buyer included in merchandise inventory?The shipping cost to be paid by the buyer of merchandise purchased when the terms are FOB shipping point. Freight-in is considered to be part of the cost of the merchandise and should be included in inventory if the merchandise has not been sold.
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