Freight Expense

Refers to the fees charged by a courier for transporting cargo. 

Freight expenses refer to the fees charged by a courier for transporting cargo from a source site to a destination point.

Freight Expense

The individual who wants the items delivered from one site to another bears the cost. The freight expense paid is determined by the form of transportation utilized to deliver the goods.

Airplanes, trains, ships, and lorries are examples of common types of transportation. Furthermore, freight firms charge variable freight rates based on the shipment's mass.

Some notable companies include DHLMaerskUPS Supply ChainExpeditors International, and C.H Robinson.

The logistics supply chain is a complex operation with several possible services throughout. The cost of these services is frequently determined by the type of goods being shipped as well as the nations to and from which they are being shipped.

The Freight Expense account is comparable to the "Cost of Sales-Freight" account, but they are completely separate entities. While payments for outgoing products boost the Freight Expense account, payments for receiving goods increase the Cost of Sales-Freight account.

Assume you own a company that exports and imports a specific sort of good. When you deliver items to clients and pay for delivery expenses, you debit the Freight Expense account, leaving the Cost of Sales-Freight account unaltered. 

When you buy products from a source and pay for a delivery, you boost the Cost of Sales-Freight account while leaving the Freight Expense account alone.

Common freight origin charges

A few regular service fees are encountered practically every day – which can be seen when looking at freight costs. 

Freight Charges

These include:

  • Dock Security

Think of port security as a parking charge! If a vessel is stored at the dock, it will be in a secure location. Nonetheless, many vehicles will enter and exit to load and unload other vessels.

  • Terminal Handling Charges (THC)

A number of duties must be completed at the dock before a shipment can be loaded onto a ferry. 

For example, the goods will be checked in at the pier a few days before the conveyance departs, just like we do for an airplane. When that day arrives, it must be carried to the transport, and cranes must load the container on board. The THC will cover the cost of these several duties.

  • Immigration Clearance 

Whatever is being shipped needs to be declared. If there is something odd or if more checks are necessary, the items may be subjected to inspections. Distinct nations have varying customs processes, as well as different rates and prohibited items. 

  • Verified Gross Mass Filing (VGM) 

When a vessel arrives at the dock, the carrier evaluates it and compares it to the mass declarations that have been provided. 

Some countries, such as China, have requirements that require every vessel to be measured before boarding a ship. Therefore, if the weight that was filled does not match the weight at the port, there may be additional expenses and delays.

  • Sealing Charges 

Once the goods have been placed into the vessel, they must be sealed to keep it safe and prevent damage – this is what sealing charges cover. There are, however, many various types of seals, and each nation has some that it accepts and some that it does not. 

That implies that when the container is sealed, it must be ensured that the seal is accepted in both the origin and destination nations in order to prevent delays or fines on the shipment.

Different Factors that affect Freight Costs

Organizations that keep inventory consider freight to be one of the most significant costs of conducting business. This is because companies can better comprehend and control accessorial costs and other surcharges if they understand average contractual freight rates. Competitive shipping prices for the firm and its clients indicate a stronger overall connection.

Shipping

Transporting items from the manufacturer's warehouses to the firm's warehouse or from the firm's warehouse to the retailer or consumer location may entail costs. The shipping expense might be billed either before or after the goods are delivered.

Some of the elements that influence freight costs are as follows:

1. High Demand for Freight 

The need for freight services also influences freight costs. During peak times for shipping space, there will be a huge amount of items to ship, and consumers will compete for the limited space. As a result, transportation firms may charge a premium for the restricted space.

When there is a low demand for freight services, shipping businesses will cut their charges to compete with the fewer consumers wishing to move cargo.

Peak season occurs every year; August to October has historically been the prime shipping season, with back-to-school and Christmas shopping driving consumer demand.

2. Federal Regulations

The governments of various nations may adopt a strategy that directly impacts the shipping industry. 

For example, during certain times of the year, government officials may limit lorry drivers' allowable driving hours. This indicates that the shipment will take more time to get to its destination.

Shipping businesses hike freight charges to clients to offset anticipated losses. Other government rules that may have an impact on freight expenses include a prohibition on night driving, pollution tax legislation, limiting the amount of goods that trucks may transport, and so on.

Documentation

3. Fuel Prices

Fuel costs are included in the freight valued methodology by some shipping firms. The cost of land and sea transportation is affected by the fuel price at the time of shipping, and the ultimate fee paid to the customer must include the fuel price during the shipping period.

If fuel prices are low, land and sea transportation will be less expensive to use, and the savings will be passed on to the customer as cost savings. However, if fuel costs rise, so will the expense of road and sea transportation, which will be passed on to the customer.

4. Rising Events

Rising events such as violence, piracy, and a corrupt government might result in higher freight charges as shipping corporations try to recoup damages. Costs may also rise when shippers choose longer shipment routes that provide greater security. 

For example, marine commerce traveling through pirate-prone sea routes such as Somalia must charge a higher price to reflect the greater risk, increased premiums, and prolonged sea routes.

Shipping firms may charge a higher cost when transporting goods through areas susceptible to terrorism and criminal groups in order to employ security or move cargo to safer forms of transit in such locations.

Types of Freight Expenses

Freight charges from freight services are incurred when items are carried between suppliers and consumers and must be expensed using the right technique to be compatible with the U.S. Generally Accepted Accounting Principles (GAAP).

On the revenue statement, freight out and freight in are classified differently. Each form of the fee is described here, along with how the expenditures are handled.

Dock

Here's a brief rundown of the contrast between Freight out and Freight in as an expenditure in accounting:

  • Freight Out

The cost of moving products away from the shipper to a customer or client is referred to as a freight-out expenditure.  

This freight charge is classified as an operational expenditure and is recorded on the financial income statements in the operating expense account section. 

If a single-stage profit and loss statement is used, Freight out charges may be indistinguishable. On the other hand, a multi-step revenue statement makes it far easier to follow Freight out.

These are major expenditures for manufacturers, producers, and wholesalers since they routinely transport items to other firms and charge them for Freight out.

  • Freight In

The transportation cost involved with receiving products from a supplier or manufacturer shipper is referred to as a freight in expenditure. 

If the products are kept in inventory, the charge is classified as cost of goods sold (COGS) and therefore is recorded under sales on the multi-step profit and loss statement.

COGS is reported and may be studied on the single-step statement, although its placement on the financial statement is described differently.

Freight in is a frequent expense for businesses, showrooms, and factories since they acquire supplies from other locations and add this expense to the price of receiving items.

Learn more about common freight charges.

How to record Freight Out expenses

There are three things to think about when recognizing the Freight out charges on the income statement

Chargesheet

1. Charge freight when it is incurred

When an organization incurs the expenses of sending items, account for the Freight out charges. 

However, since some freight out charges may not be known until they are charged, they may be unable to do so right away. To account for the difficulty, many businesses report their Freight out charges at the time they receive the invoice, regardless of when the cost was incurred.

2. Include Freight out in the cost of items sold

Because freight or shipment expenses are proportional to the amount of items sold, they are classified as a cost of goods sold. Therefore, companies calculate freight charges into the cost of products sold and display them in the income statement to reflect this. 

This demonstrates that freight transportation costs are not an operating expense but rather a variable cost based on the number of items sold. This enables businesses to plan for it more efficiently because the cost fluctuates with sales rather than being a fixed expense.

3. Billing the consumer

If a business sends the Freight out cost to the client, they may record it in the income statement as an outstanding charge next to the freight expenditure. In this manner, when the buyer pays, the cost is offset. 

Depending on what the organization charges the client and what they pay for the invoice, the organization may have a negative freight out expenditure. However, if the business operations rely heavily on Freight or shipment, they can include the invoicing to the client as revenue rather than a bill.

Example of Freight Out expenses

As an example of Freight out costs, consider the following:

Joel Motors is a New York vehicle manufacturer with a worldwide dealership customer in Ottawa, Canada. To operate with this customer, it must send its automobiles through Freight from New York to Ottawa. 

Map

It sends 200 automobiles to Ottawa every quarter for $1,100 each car, for a total freight cargo of $500,000 every quarter. This is recorded by Joel Motors in the cost of commodities part of its revenue statement:

Product cost

-$1,000,000 in materials

-$220,000 for freight out

However, the shipping fee is passed on to the dealership in Ottawa as part of the transaction. Joel Motors can report the freight out shipment charge on its income statement as follows to offset the expense:

Product cost

-$1,000,000 in materials

-$220,000 for freight out

The shipping bill from the Ottawa dealership is $220,000.

Freight related terms

Shipment Receiving

Below is some freight-related terminology to better understand how to discuss freight expenses.

1. Free on board (FOB) shipping point

The concept of "free on board" refers to whether the customer or seller is responsible for products that are misplaced, destroyed, or damaged during transportation. 

When a free-on-board shipping point is utilized, it signifies that the customer assumes this liability the minute the items are delivered to the freight company. 

The term FOB shipping point refers to the fact that the sale takes place at the shipping point, and the customer pays for the cargo as a freight-in shipment. When the products arrive at the shipping location, they legally become the buyer's property.

2. Free on board (FOB) destination

Free on board destination indicates that the seller retains responsibility for the items until they are delivered to the customer. This also implies that the seller has legal ownership of the items and is accountable for them during the delivery procedure. 

The seller pays for delivery, and the point of sale happens when the shipment arrives at the buyer's or destination's location. When the products are delivered, ownership passes from the vendor to the customer.

FAQs

FAQs

Financial Statement Modeling Course

Everything You Need To Master Financial Statement Modeling

To Help You Thrive in the Most Prestigious Jobs on Wall Street.

Learn More

Researched authored and by Shannon Fernandes LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources: