Freight Charges & Costs Accounting Guide

Author: Bryan Van Suchtelen
August 07, 2023

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One of the questions we get often is about accounting for freight costs — specifically, how to record freight costs in accounting. Managing cash flow and revenue in businesses, especially ones reliant on vast supply chains, becomes even more intricate when freight costs and transportation expenses come into play.

In this post, we’ll discuss what makes freight in accounting different from accounting for other expenses, drawing from accounting principles that specifically cater to the logistics domain. If you're looking for freight management, check out our Shipping Invoice Management Solutions.

Two Types of Freight Cost Accounting Classifications

The world of freight cost accounting, though intricate, is fundamentally centered around two primary classifications. Understanding these distinctions is essential for accurate financial reporting and strategic decision-making. Here’s a concise breakdown:

Freight-in Costs (Inventory-related Freight Costs):

  • Definition: These are the costs associated with transporting goods or materials to your business. Whether you're acquiring inventory, raw materials, or supplies, the costs incurred to get these items to your location fall under this category.
  • Accounting Treatment: Such costs are capitalized, meaning they are added to the value of the inventory. When the inventory is sold, these costs are then recorded as part of the cost of goods sold (COGS), affecting the gross profit.
  • Example: If a company buys raw materials for manufacturing and pays the supplier for shipping those materials, the shipping charges are considered freight-in costs.

Freight-out Costs (Sales-related Freight Costs):

  • Definition: These are the costs related to transporting finished goods from your business to the customer. If you offer free shipping or bear the transportation costs as a service, the associated expenses are classified under freight-out.
  • Accounting Treatment: These costs are typically considered operating expenses and are taken directly against revenues in the period in which the sale occurs. They reduce the overall operating income of a business.
  • Example: When a business sells a product online with a "free shipping" promotion, the cost the business incurs to ship the product to the customer is a freight-out cost.

Distinguishing between these two types of freight costs is essential. While both involve transportation, their financial treatment differs significantly. Properly categorizing and accounting for these costs ensures accurate financial statements, helping businesses make informed operational and strategic decisions.
AP Controls For Shipping Invoices

Setting Up Accounting for Freight Charges

To set up your accounting system properly, especially in today’s age where supply chains are complex, you start with your chart of accounts. Just like anything else, you need to properly record what happens in your business. Identifying that freight expense relative to what it’s related to is very important.

If you don't have a freight expense account, you should set one up in your chart of accounts. And anything that you pay out relative to shipping goods to your customers should be recorded there.

If you're buying inventory or you're buying components to make finished goods, all of the associated freight would go into a freight sub-account within your cost of goods sold account. So you’ll have two freight expenses in your chart of accounts to keep those separate. An efficient system differentiates these expenses, aiding in effective cash flow and revenue management.

Lojistic can automatically code your freight shipping costs according to your business rules.  Automated GL coding is just one of the features available to you through our Shipping Invoice Management Solutions.

Common Mistakes in Freight Cost Accounting Departments

Catching mistakes in freight cost accounting is important because of the ramifications. How you book your cost of goods sold, for example, is governed by an IRS rule. You can dig into it more on the IRS website, or you can chat with a Lojistic freight expert by calling 800-783-5753 or scheduling a convenient time for us to call you through Lojistic's Contact Us page.

Let's dive into some common pitfalls:

  • Misclassification of Freight Costs: Mixing up freight-in (costs for shipping goods to your business) and freight-out (costs for shipping products to customers) can lead to skewed financial reports. Properly distinguishing between these two is crucial for accurate profit and loss statements.
  • Overlooking Additional Charges: Many accounting departments focus solely on the primary shipping charge and neglect additional accessorial costs like customs, duties, or handling fees. This oversight can lead to understated expenses and incorrect inventory valuation.
  • Lax Invoice Verification: Without proper checks, you might pay more than required. Inaccurate invoices, whether from human error or intentional overcharging, can impact a company's cash flow.
  • Not Adhering to Accounting Principles: GAAP (Generally Accepted Accounting Principles) provides guidelines on how freight costs should be recorded. Neglecting these principles can have compliance repercussions and mislead stakeholders.
  • Inefficient Systems and Processes: Relying on outdated or manual processes can lead to errors. Automated systems and streamlined logistics can minimize human error and ensure accurate record-keeping.
  • Failure to Reconcile with Actual Receipts: It's common for the amount in shipping invoices to differ from actual charges. Regular reconciliations help catch these discrepancies.
  • Neglecting Periodic Audits: Regular audits of freight accounts can identify recurring mistakes or inefficiencies, offering opportunities for savings and improved accuracy.

It's not uncommon for accounting departments to grapple with the correct recording of freight costs, often receiving the brunt of blame for inconsistencies. Relying solely on them to sift through invoices to determine the type of freight expense is not a practical approach. A systematic approach to code these invoices right from the source ensures that, once the information reaches the accounting department, there's no ambiguity.

Laid-Down Costs & Asset Value Factors

Laid-down costs encompass all expenses tied to a product. Any freight-in, that is, charges associated with having inventory or parts of inventory shipped to you, becomes part of the laid-down cost.

In the context of freight cost accounting and logistics, understanding these costs is pivotal. Here's why:

  • Complete Cost Overview: Laid-down costs provide a full perspective on the true cost of products, including the purchase price, transportation fees, customs, and other related charges. This aids in informed pricing decisions and ensures profitability.
  • Accurate Inventory Valuation: Properly accounting for laid-down costs is crucial for valuing inventory. This has ramifications on financial statements, impacting revenue and operating expense calculations.
  • Supply Chain Decisions: A comprehensive view of laid-down costs can influence supplier choices, shipping methods, and inventory strategies. For instance, high costs from a specific shipping route might prompt a search for alternatives.
  • Cash Flow and Tax Implications: Unexpected laid-down costs can affect cash flow. Accurate calculations are also essential for tax compliance, ensuring businesses avoid penalties for misreporting.
  • Negotiation and Asset Valuation: Knowledge of these costs strengthens negotiation with partners and accurately determines the company's asset value, essential for investment decisions and financial reporting.

Importance of Accurate Record Keeping For Optimized Freight Cost Accounting

Accurate record-keeping is crucial for optimizing shipping or freight cost accounting. A keen eye on invoices, an understanding of shipping charges, and a thorough record can provide a clearer picture of controllable and non-controllable expenses, guiding effective business decisions.

In essence, understanding freight cost accounting is a two-pronged approach: ensuring accurate classification and setting up an accounting system to track these charges distinctly. Analyzing this information aids businesses in managing their revenue and cash flow effectively. Here's why maintaining accuracy in record-keeping is pivotal for optimized freight cost accounting:

  • Financial Clarity: Precise records ensure clear visibility into cash flow, revenue, and operating expenses. By understanding how much is spent on freight costs, businesses can better forecast budgets, manage finances, and identify areas for potential savings.
  • Compliance with Accounting Principles: Freight costs, like shipping charges and invoices, must be recorded in compliance with standard accounting principles. Accurate record-keeping ensures that businesses remain compliant, avoiding potential financial discrepancies or audit issues.
  • Inventory Management: The cost of shipping goods, whether it's an inventory purchase or sale, directly impacts inventory costs. By maintaining clear records, businesses can determine the true cost of their inventory, impacting pricing, sales strategies, and profitability calculations.
  • Informed Decision Making: With accurate records, businesses can analyze data trends, such as spikes in transportation costs or recurrent overcharges. This analysis can influence negotiations with carriers, selection of shipping methods, or changes in supply chain strategies.
  • Dispute Resolution: Mistakes can happen, and sometimes businesses are overcharged by carriers. With detailed and accurate records in place, these discrepancies can be quickly identified, and disputes can be resolved faster, ensuring that businesses don’t overpay.
  • Operational Efficiency: A systematic record-keeping process reduces the time and effort spent by accounting departments sifting through freight invoices. Instead of deliberating on which charge goes where, a clear system will allow for instant categorization and recording.
  • Strategic Logistics Planning: Accurate data paves the way for strategic decision-making in logistics. Knowing exact costs and historical data can lead to better negotiations with carriers, route optimizations, and even decisions about warehousing.
  • Building Trust with Stakeholders: Transparency is crucial for maintaining trust. When stakeholders, be it investors, partners, or even employees, know that a business has meticulous records, especially regarding finances, it fosters trust and credibility.
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How Can Lojistic Help with Freight Costs?

At Lojistic, we're more than just a freight management solution. We're your partners in optimizing and streamlining your shipping and associated freight costs.

Bill & Service Shipping Audit: Not sure where you stand? We offer a comprehensive bill & service  shipping audit. Our team of experts will delve into your shipping history, evaluating invoices, and tracking down any overcharges or areas where savings could have been achieved. This audit isn't just about identifying mistakes; it’s a learning opportunity. We’ll provide actionable insights and suggestions on how to optimize your shipping procedures and reduce costs.

Moreover, our free platform is designed to automate many aspects of the freight cost accounting process, reducing manual workload, minimizing errors, and ensuring you're always in line with the latest accounting principles. By using Lojistic, you're not just adopting a tool; you're embracing a holistic approach to efficient and effective freight management.

For a deeper dive into how we can assist and to experience the Lojistic difference, reach out to us or book a meeting with one of our Freight Experts. Together, we'll ensure your freight cost accounting is not just compliant but optimized for financial success.

 

Author

Bryan Van Suchtelen

Bryan Van Suchtelen

Corporate Director of Parcel Rate Services

With more than 34 years of parcel experience, Bryan Van Suchtelen is the Corporate Director of Parcel Rate Services at Lojistic, one of the nation’s top logistics and transportation cost management companies.

Prior to joining Lojistic in 2015, Bryan enjoyed a 26-year career with UPS where his roles included Pricing, Field Sales and Director-level Sales Management of some of UPS’s largest customers.

At Lojistic, Bryan leverages his wealth of experience/expertise to identify and execute supply chain cost management solutions for parcel shippers of all sizes. Bryan has helped his customers reduce their shipping spend by tens of millions of dollars.
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