Across many market sectors closely allied with logistics, there is some uncertainty about how and when to record freight costs in an enterprise’s general accounting. Even many accounting professionals may not be entirely familiar with the norms that accrue to dealing with freight in accounting and freight costs accounting in general. This can lead to confusion that may undermine the accuracy of your financial projections.
Luckily, this issue is not nearly as complex as it might appear at first. Freight in accounting can generally be handled in a way very similar to other expenses and costs of doing business. There is one key difference, however: Freight costs accounting should be handled diligently and updated on a regular basis, since the accuracy of your accounting can bear on freight claims you might make, and time is a key factor in all such claims.
Generally speaking, your freight expense account is treated just like any other expense account when the accounting equation must be used. Freight expenses are considered to have a normal debit balance, with decreases being noted as credits and increases noted as debits, as a financial professional would probably expect.
If everything about these costs is conventional, what is the cause of the confusion?
There are a few nuanced, but important details to keep in mind in freight logistics accounting:
- If the freight is part of an asset’s cost, it is to be considered an extension of the asset’s overall value. That means that, in practice, it is recorded as part of the asset’s value and figured into your calculations as a “laid down cost.” Your ledger must reflect the figures accordingly.
- Freight expense accounts must not be confused with similar types of expense accounts, or other accounts that might be related to your logistics network. It is easy to make the mistake of conflating your freight account with your “cost of sales-freight” account.
However, it’s easy to keep these accounts separate when a few distinctions are kept in mind:
- When goods are delivered to your clients around the world, you record the cost of making that delivery in the form of a debit that impacts your freight expense account.
- When you purchase goods from a supplier who requires you to pay for shipping costs attendant to that order, regardless of how much is paid, you debit your “cost of sales-freight” account.
It is crucial that the members of your accounting team remain vigilant about costs relating to logistics. Optimizing your overall logistics cost profile can save you a significant fraction of the cost of every logistical transaction, whether incoming or outgoing. One of the critical factors in optimizing your nationwide, regional, or even global supply chain is evaluating existing cost structures and relationships – the better your records, the more opportunities for savings will present themselves. A trustworthy logistics consultant can help you maximize your efforts.
We consider ourselves to be pretty damn trustworthy, and have helped hundreds of clients optimize their freight operations. Drop us a line to learn how we can help.