ACCOUNTING FOR FREIGHT COSTS: FREIGHT EXPENSE ACCOUNT VS. COST OF FREIGHT-SALES ACCOUNT
In some company verticals as well as in manufacturing sectors where transport acquisition or procurement for freight is an element of their day to day business, there is a lot of uncertainty as regards how and when to analyze general company’s freight accounting.
Some companies’ accounting departments are not familiar with both the normal and customs charges that sometimes arise when managing freight and shipping costs. This is something that can lead to confusion which undermines the accuracy of all the business financial projections.
Recent research shows freight costs often take up as much as ten percent of the total expenditure incurred by an organization. Freight cost accounting should not be handled in the same way other costs and expenses incurred, possibly even bringing in a third party partner like DTA Services to help audit and help find additional savings.
Understanding the concept of Freight and Shipping expenses
In accounting, the idea of a freight expense or freight spend account can be generalized as a payment for sending out a product to a customer. This falls under the canopy of category of expenses and it is also treated like other expense accounts as regards to accounting equation. However, under the generally accepted accounting policy or rules, if the freight is regarded as part of the cost of an asset, it is then recorded as part of the value of the asset on the financial statement as laid down costs.
The Freight expense has a usual debit balance. Increases or credits are recorded as debits while on the other hand decreases are recorded as credits. In relation to other accounts, the Freight Expense account is comparable to the “Cost of Sales-Freight” account, but they are two different entities. The Freight Expense account is increases for all payments towards outgoing goods, while the Cost of Sales-Freight account decreases for payments towards incoming goods.
Freight and Shipping Expenses
The major distinction with normal accounting is that freight cost accounting ought to always be handled and updated in a thorough manner, since your accounting correctness and accuracy may bear on the freight claims you may end up making at the end of the day, and time always remain an important factor when you are making these claims.
If you have to use the accounting equation, you must treat the freight expense account exactly the same way you would treat any other expense account. All the freight costs should have a standard debit balance; therefore all your credits and increases should be noted and recorded as debits.
Confusion managing your Freight and Shipping expenses
When you are accounting for freight costs, there are a number of nuances that you need to keep in mind;
Freight Costs: Provided your freight is part of the cost of an asset, then you should take it as an expansion of the assets total value. You, however, need to take note or record the cost as part of the value of the asset, and figure it in your calculations as part of the “laid down cost.” Make sure that the figures are shown in your ledger accordingly.
Be acquainted with the Cost of Freight: when you start accounting for the freight costs, make sure you don’t confuse the freight expense account with some other similar expense accounts, or several other expense accounts which could be related to the logistics department.
There is a need to remain vigilant at all times when accounting for freight costs. Be certain that you optimize the freight accounting practices for all shipment that is made, not considering whether the consignment is inbound or outbound. In order to optimize your supply chain, it is necessary to evaluate all the existing cost structures and relationships which would allow you to maintain better records, and at the same time gives you with better chance of making savings in the future.
Mange your Freight and Shipping expenses
Your freight expense should not be treated just like other expense accounts when using accounting equation. Freight expenses are considered and known to have abnormal balance, with decreases being known and noted as credits.
So contact DTA for a free consultation session and we will show you how we can save your funds by providing an efficient freight auditing process
Transportation and Logistics
The Freight Audit Process: We provide your logistics team with data and reports on shipping patterns and associated costs, including: origin and destination; drop ship locations; actual weight; cube weight; customer or supplier name; transfer between locations and/or warehouses; and any other industry specific fields clients require.
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