The main difference between freight in vs freight out is that freight in is transportation expense incurred on purchasing the goods. On the other hand, freight out is transportation expense incurred in the sale of goods.
Generally, freight is transporting goods and products across the continents via water resources such as oceans and seas. When a company delivers its products to its buyers, freight charges are brought about from freight work, and the right procedure must expense them to align with accounting laws that are usually fixed and recognized. We can classify freight in and out in several ways on the income statement. The explanation of each classification of charge, how the cost is tackled, and how we can account for both freight in and freight out is given below:
What is Freight out?
The charge is called freight out if the company or producer delivers its products with the help of a freight company, and the producer/seller company is responsible for paying freight charges. In other words, we can say that freight out is the expense of the export of supplies from the manufacturer to the buyer.
Is freight out an operating cost?
Operating expenses are those used to run the company, particularly the raw materials utilized in manufacturing the products. The expenses incurred due to the supply of the products may or may not be considered an operating expense.
- We can take freight out as an operating cost because it is the amount required to pay to the freight out company for the transport of the goods or products; thus, in other words, it is required for operating the company and supplying the products to the buyers. Hence, it’s an operating expense from this perspective.
- On the other hand, we can also consider freight out as non-operating expense because manufacturer only pays this amount when it delivers its product to a buyer. So, It is not a regular necessity for running the company. Hence, it is not operating cost. So, it depends on your interpretation of the operational aspects.
How can we manage to accounting freight out?
The primary way is to take freight out as the expense right after it is brought about. A problem that might occur over here is the span in which it is considered. All the expenses related to the sale are recorded in the span the sale had occurred. However, the issue is that the shipping entity does not provide you with the bill or financial statement before the upcoming month.
In this way, the cost recognition is wrongly put off, or we can say the prudence concept is compromised. Most businesses do not consider it essential to put off their expenses in the correct period. They hold back until the freight company sends them the bill, no matter how long it takes and what the period is.
Gathering freight out in the exact span is more of a headache than its benefits. You will have to keep track of each and every export and each freight billing to check which transportation is not billed by the freight company till the time being. Another problem with freight out is what to do if we re-bill the freight expense to the buyer. You have two options then, one is to rather consider the re-bill as a sort of profit for the company while the other option is to offset the bill in opposition to the freight out cost already recorded in the financial statement.
Can we consider freight out billings as revenue?
The charging on customers for the payment of freight out is considered as a revenue if and only if earning profit in this way is the main objective of the freight out company. In this case, the revenue earned is outlaid in a different profit and loss account to make it easy for the financial managers to analyze the profit gained via this activity. As the profit earned through freight out is individually analyzed and outlaid, the expense related to freight out must also be recorded individually.
However, if a buyer analyzes the profit, the expense of freight out is not to be ignored as it can result in a large decrease in profits by the buyer. It can be much costly, especially when the transportation is over large distances, across continents all over the world. Secondly, it would also be expensive if the product is ordered urgently. Last but not least, if you have ordered heavy and large bulky products such as cars, there will too be a burden on your budget.
What is freight in?
When a company buys the raw materials to produce its goods, it requires freight to import those materials. This expense the company has to pay to the supplier is called freight in expense. Freight is a fraction of the manufacturing procedure, that is, the cost for purchase.
Is freight in an operating expense?
Yes, freight is clearly an operating cost as it is required to run the company and is essential for manufacturing the goods and products to continue its services.
How can we manage accounting for freight in?
There are one to two methods to account for freight in expenses.
- We can place it in the value/amount of inventory. In that case, it will not be counted as an expense until and unless the manufactured products are successfully produced and sold. It would be beneficial if you desire to temporarily put off the expense acknowledgement. This is the treatment as per International accounting standards.
- There is another method to tackle freight expenses. We can charge it directly to expenses as incurred in the income statement. This would be highly advantageous if the value of freight in is comparatively less. This also lessens the effort to analyse how much freight in expense is involved in finishing inventory records. This method is highly recommendable as it increases the expenses for the time being, but in fact, in most companies, the freight in cost is generally less.
Conclusion freight in vs freight out
Freight in is a transportation expense incurred when the business purchases the products. It can be added to the value of purchase inventory which is the correct accounting treatment per international accounting standards. On the other hand, you can opt to expense it subject to permission by local regulations. On the other hand, freight out is about selling the products. This cost is incurred when the product is sold to the customer. If the selling company pays freight out, it’s recorded as an expense. However, if the selling company re-bills customers for the freight out expense, it can be offset against the cost incurred for freight out. Alternatively, it can be recorded as a profit subject to certain conditions.