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Chapter 5: Purchase Considerations For Merchandising Businesses
- If goods are sold F.O.B. destination, the seller is responsible for costs incurred in moving the goods to their desired destination. Freight cost incurred by the seller is called freight-out, and is reported as a selling expense which is subtracted from gross profit in calculating net income.
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.
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Back To All QuestionsYou might also be interested in... What costs are included in costs of good sold?
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...
What is the journal entry to record freight-out?
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...
What is the
journal entry to record freight-in?
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.
What costs are included in costs of good sold?
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...
What is the journal entry to record freight-out?
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...
What is the journal entry to record freight-in?
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.
What is Freight Out?
Freight out is the transportation cost associated with the delivery of goods from a supplier to its customers. This cost should be charged to expense as incurred and recorded within the cost of goods sold classification on the income statement. Freight out is not an operating expense, since the supplier only incurs this cost when it sells goods to a customer [rather than incurring it as part of day-to-day company operating activities].
Freight-out billings to customers should only be treated as revenue when doing so is the primary revenue-generating activity of the shipping entity. In this situation, freight revenue should be recorded in a separate revenue account, so that management can clearly see how much revenue is being generated by this activity. And, since freight revenue is being separately recorded, then so too should the associated freight expense. Doing so makes it easier to determine the amount of profit generated by these freight billings.
In some cases, the amount of unreimbursed freight out is so small that the balance in the freight out account is aggregated into the "other cost of goods sold" line item in the income statement.
Freight Out in Profit Analysis
If a profitability analysis by customer is developed, the cost of freight out should be included, since this can sometimes result in a significant reduction in profits by customer. This is especially the case when deliveries are being made over long distances, on a rush basis, or when the delivered goods are bulky.