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). Show
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 AnalysisIf 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. 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 credit.  Previous Question Next Question Back To All Questions 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... Read More 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. Read More What are selling expenses?Any cost or expenses that is incurred to sell or promote a product or service is considered a “selling expense”. Selling expenses are a key category of operating expenses, which means they are subtracted from gross profit to calculate operating profit. Selling expenses are typically categorized as period expenses, which means that they are recognized... 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. If you are studying for the CPA exam, then sign up for a free trial to have full access to the Universal CPA platform for 7 days here. Universal CPA is the only course that has visual learning and bite-sized video explanations for every single MCQ and simulation. To learn more about the Universal CPA course and see a demo of the course, visit this link. Previous Question Next Question Back To All Questions 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... Read More 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... Read More 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. Is there a freight out in perpetual inventory system?Explanation: Under the perpetual inventory system, cash freight costs incurred by the buyer for transporting goods are recorded into inventory along with the cost of the goods.
Is freight out part of merchandise inventory?Delivery expense to be paid by the seller when its merchandise is sold with terms of FOB destination. This is an operating expense and is not included in the cost of merchandise.
Is freightIn the periodic inventory system, on the other hand, inventory purchases are recorded in an expense account called purchases, and here transport costs would also be recorded in an expense account usually called freight-in. Both purchases and freight-in are reported as part of Cost of Goods Sold in the income statement.
Where does freight out included?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.
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