What are Freight In and Freight Out?
Freight in and freight out are logistics concepts used to track the costs involved in the movement of goods into and out of a specific location. In the context of maritime and shipping, they represent the flow of cargo into and out of ports, vessels, and distribution centers.
What is Freight In?
Freight in is an important financial concept in logistics and supply chain management and is one of the ways organizations measure overall transportation costs within their operations. It includes the cost of raw materials and shipping expenses. These expenses are part of a business’ regular operation, and they are recorded as a debit in their accounting records. Accurately accounting for freight in is crucial for businesses to manage their expenses correctly and calculate the true cost of goods sold.
How to Properly Document Freight In?
Businesses should follow these five steps to accurately account for the costs of freight in within their records:
- Calculate the total freight costs: include all shipping-related costs, including shipping, handling, storage, port fees, and transportation from the port to the final destination.
- Debit the inventory account: subtract the freight charge from the inventory account to give an accurate cost of the materials or goods received.
- Credit cash or accounts payable: decrease cash if paid immediately, or create a liability if payment is due later.
- Keep your inventory records up to date: freight in costs are part of the cost of goods sold (COGS) when inventory is sold. Accurate reporting ensures the correct calculation of profit margins.
- Add the freight charge to the company financial statements: list the freight charge as a direct cost under the cost of goods sold on the income statement. Additionally, it should be represented as a reduction in the inventory account on the balance sheet.
What is Freight Out?
Freight out refers to the cost of transporting goods from the seller’s location to the buyer’s location. It includes all expenses that the seller incurs in shipping their products to the customer. Properly understanding and budgeting for freight out costs is crucial for businesses involved in maritime trade, as it impacts pricing strategies, profitability calculations, and overall supply chain planning.
Who is Responsible for Freight Out Costs?
Typically, the seller is responsible for the cost of freight out, unless otherwise specified in the sales contract. This is common with Incoterms like ex works or free on board, where the seller is responsible for delivering the goods to a specific point, after which the buyer takes over.
The buyer may be responsible for freight out under certain Incoterms, such as cost, insurance, freight; or cost and freight. In these cases, the seller covers the cost of the goods and transportation to a designated port while the buyer manages further shipment and related expenses.
For the seller, freight out is considered a selling expense and is not included in the cost of goods sold (COGS). It is recorded as a separate expense category on the income statement. This categorization reflects that freight out is not directly related to the production or purchase of the goods but is an additional cost incurred in delivering them to the customer.
Factors Affecting Freight Out Costs
The cost of freight out can vary significantly depending on several factors, including:
- Distance: longer distances generally translate to higher transportation costs.
- Mode of transport: air freight is typically the most expensive option, followed by ocean freight and then ground transportation.
- Type and size of goods: bulky or heavy goods often incur higher freight charges compared to smaller or lighter items.
- Urgency of delivery: expedited shipping options can significantly increase the cost.
How to Properly Document Freight Out?
Businesses should follow these five steps to accurately account for the costs of freight out within their records.
- Calculate the freight charge amount: this includes all expenses in getting the final product to the customer, including shipping, handling, and other fees.
- Credit the inventory account: apply freight charge to the inventory account so it accurately reflects the cost of the completed goods sold.
- Debit the cash or accounts receivable account: freight out should be deducted from the cash, or accounts receivable account, since it represents the payment received from the customer.
- Update inventory records: this includes the cost of finished goods sold and freight charges.
- Record freight charges on any financial statements: freight charges should be shown as a selling expense on the income statement. If payment has not been received, it should appear on accounts receivable.