3/30/2024 0 Comments Freight inventory turnsThis should result in a pretty small freight out expense. Instead, you would normally offset freight billings to customers against the freight out expense line item. It seems like a strange business model if that’s how a company turns a profit. The choices are to either treat the billing as a form of revenue, or to offset the billing against the freight out expense.įreight out billings to customers should only be treated as revenue if doing so is the primary revenue-generating activity of the business. And to make the decision even easier, I’ve never heard of an audit firm that forces its clients to accrue for unrecorded freight out.Īnother issue with freight out is what to do if you re-bill the freight charge to the customer. You’d need to match up every shipment with every freight billing to see which shipments haven’t yet been invoiced by the shipping company, and estimate what the invoice should be, and then create an accrual. I would say that accruing freight out in the proper period is more of a pain than it’s worth. They just wait for the freight invoice to arrive, and record it in whatever period that happens to be. Given the amount of expense involved, a lot of companies don’t bother to accrue the expense in the correct period. But, with freight out, you may not receive an invoice from the freight company until the next month, which means that the expense recognition is incorrectly delayed. Under the matching principle, all costs associated with a sale are supposed to be recognized in the same period as the sale. A possible issue here is the timing of the recognition. The basic method is to charge freight out to expense as soon as you incur the cost. And, as was the case with freight in, there’re a couple of ways to account for it. This is the shipping and handling cost required to deliver goods to customers. Accounting for Freight OutĪnd then there’s freight out. In this case, you might have to capitalize the freight in cost, just to avoid questions from investors and lenders about why there’s this weird expense showing up in the income statement. If you were charging freight to expense all through the year, you’d have these odd looking financial statements that have a small amount of cost of goods sold in every month, but no offsetting sales, because sales only occur during the prime selling season. Let’s say you produce goods all year long, but only sell them during a high season, like during the summer or the winter holidays. There is one case where you might not want to do that, and that would be in a business with seasonal sales. So, in short, I suggest charging freight in to expense as soon as you receive the invoice from the freight company.īut. And on top of that, you have to factor freight costs back out when doing a lower of cost or market analysis. It’s just one more item that gets loaded into the bill of materials or allocated through overhead, and one more item that the auditors need to be aware of when they examine the year-end inventory balance. The main reason for an immediate charge off is to keep freight in from mucking up the inventory records. Yes, it accelerates expense recognition a bit, but for most companies, the amount of expense involved is pretty small. I come down pretty hard in favor of charging off freight in right away. On the other hand, this could result in charging a bit more to expense up front than would otherwise be the case. This works pretty well if the amount of freight in is relatively small, and it reduces the amount of work involved in figuring out how much freight cost is included in the ending inventory balance. Another option is to charge it straight to expense as incurred.
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