Editor's Note: This post has been updated with new links and content.
Original Publication Date: May 31, 2013
One of the questions we get a lot is about freight cost accounting — specifically, how to record freight costs in accounting.
In this post, we’ll discuss what makes freight accounting different from accounting in other fields. If you're looking for freight management solutions or cost savings options, check out our LTL & Truckload services page.
Two Types of Freight Cost Accounting Classifications
There are certain concerns that you have when you're accounting for freight costs. And it typically revolves around two types of freight costs.
One of them gets added to the cost of your inventory, which makes it part of your asset value. The other is a freight expense.
You need to keep track of how and why you're paying for the freight costs. If you're buying inventory, for example, the supplier might charge you for the freight. That freight cost would go into a freight account that is incorporated into your cost of goods. So that's part of your inventory costs.
If, however, someone buys something from you and you have to pay the freight to get it to them, that gets recorded like any other freight expense.
Those are the two main differences. Setting your accounting system up so that you can see and record the differences between the two is very important so your financial statements are accurate.
Setting Up Freight Cost Accounting
To set up your accounting system, 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 you're spending it for 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 would go there.
If you're buying inventory or you're buying component parts for your business to make your assets, all of the freight associated with that would go into your freight account or your cost of goods sold account. So you’ll have two freight expenses in your chart of accounts to keep those separate.
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. So it's not something that you can pretend to do or do sometimes, it's something you have to do.
Not setting your accounting up to record those expenses every time, in the right buckets, can have tax implications for any company.
All that said, many general accounting departments still struggle with how and when to record freight costs and get blamed for not doing things correctly. But having an accounting department sifting through freight expenses to decide which is freight in and freight out is not a good operational practice.
You need a downstream system to properly code those invoices as they come through. That way, when accounting gets the information, they just record it.
They may not know whether it's a part of an inventory buy or if it's part of something that was shipped out to a customer. But the folks on the dock would know that. You need to push it downstream to that level of your operation to make sure that by the time it gets to accounting, there's no doubt where it should go.
Laid-Down Costs & Asset Value Factors
Laid-down costs are all costs that go into a particular product. In the examples above, the freight that you paid to have inventory or parts of inventory shipped to you, so freight-in, that would be part of the laid-down cost.
Every other cost associated with that inventory would be part of the laid-down costs. And this is how you're calculating your cost of goods sold.
Importance of Accurate Record Keeping For Optimized Freight Cost Accounting
Accurate record-keeping is crucial for optimizing shipping or freight cost accounting.
Most of the time when you're optimizing your freight, the first place you'll look at is spending. The place you’ll find that is in your accounting records.
When you separate freight cost accounting, some of the costs are controllable and some are not. If you aren't accurately keeping records of your freight expenses, whether they're part of your inventory or whether it's your freight-out, you won't have a good picture of where you can exert pressure to optimize your expenses.
In other words, if what your reports and records are telling you is inaccurate, then you'll also make inaccurate business decisions.
That’s why it’s critical to understand freight cost accounting from an operational point of view and an accounting point of view. First, are we making sure that all of these are classified correctly? Second, is our accounting system set up so that it is keeping those two separate?
Then you analyze that information. Are they controllable or uncontrollable expenses? Your financial statements, if they’re accurate, will give you that information.
For more information on how you can join the thousands of nationwide shippers currently using Lojistic to send cost packing, please contact us here.