Freight in journal entry
Overview
Freight-in cost incurs when the company as the buyer needs to pay for the transportation of goods that it purchases from the suppliers. Likewise, the company needs to make journal entry for freight-in by recognizing this cost as a part of merchandise inventory if it uses the perpetual inventory system or recognizing it as a part of net cost of purchases if the company uses the periodic inventory system.
Journal entry for freight-in under the periodic inventory system is a bit easier as the company just needs to record this cost in the freight-in account or transportation cost account as the net cost of purchases. After all, under the periodic inventory system, the inventory account and cost of goods sold account will only be updated when the company performs the physical count of the inventory (usually at the end of the period).
On the other hand, the company needs to record the freight-in cost as a part of the cost of the inventory purchased under the perpetual inventory system. This is due to the cost of inventory includes all costs necessary to acquire the inventory and the freight-in cost falls into this category as the freight is necessary for the goods to be delivered to the company as a buyer.
Freight-in journal entry
Periodic inventory system
Under the periodic inventory system, the company can make the freight-in journal entry by debiting the freight-in account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Freight-in | $$$ | |
| Cash | $$$ |
Similar to the purchase account, the freight-in account is a temporary account that will be cleared at the end of the accounting period when the company makes the cost of goods calculation. In this case, the freight-in cost will be shown as an additional amount to the net purchase (purchase – purchase return and allowance – purchase discount) of the merchandise inventory when the company calculates the cost of goods sold.
Perpetual inventory system
As mentioned, under the perpetual inventory system, the company needs to record the freight-in cost as a part of the inventory cost. Likewise, the company needs to make the freight-in journal entry in this case, by debiting the freight-in cost into the inventory account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Inventory | $$$ | |
| Cash | $$$ |
In this journal entry, the freight-in cost is included in the inventory cost and only be transferred later to the cost of goods sold when the inventory is sold. This means that the company needs to allocate this cost into the different types of merchandise inventory that it belongs to as the company usually has different types of merchandise inventory in its account.
Freight-in example
For example, on October 1, the company ABC makes a cash purchase of the merchandise goods that cost $20,000 from one of its suppliers. And in addition to the $20,000 cost of goods, the company ABC also needs to pay an additional $100 as the freight-in cost for the goods to be delivered to its place.
The company ABC uses the periodic inventory system and it receives the above merchandise on the same day of the purchase.
What is the journal entry for the freight-in cost that the company ABC needs to make on October 1, as well as the purchase of merchandise above?
Solution:
As the company ABC uses the periodic inventory system, it can make the freight-in journal entry as well as the purchase of merchandise on October 1 as below:
Purchase cost of merchandise
| Account | Debit | Credit |
|---|---|---|
| Purchases | 20,000 | |
| Cash | 20,000 |
Freight-in cost
| Account | Debit | Credit |
|---|---|---|
| Freight-in | 100 | |
| Cash | 100 |
In this journal entry, the freight-in journal entry is separate from the purchase cost of merchandise journal entry. However, this is simply to make it easy to understand. In practice, we usually record only one journal entry in this case.
Likewise, these two journal entries are usually recorded as a single journal entry by combined them together as below:
| Account | Debit | Credit |
|---|---|---|
| Purchases | 20,000 | |
| Freight-in | 100 | |
| Cash | 20,100 |
Example 2:
For the second example, assuming that the company ABC above uses the perpetual inventory system instead.
In this case, the company ABC would record the $100 of the freight-in cost as a part of the inventory cost under the perpetual inventory system as below:
| Account | Debit | Credit |
|---|---|---|
| Inventory | 20,100 | |
| Cash | 20,100 |
In this journal entry, there is no freight-in account as the freight-in cost is included in the cost of the inventory.
It may be useful to note that most companies consider the allocation of the freight-in cost to the merchandise inventory to be wasteful of time and effort and they usually record the freight-in cost into the cost of goods sold directly when this cost is considered to be insignificant or immaterial. This is due to it usually take a bit of time and effort to allocate the freight-in cost to the different types of merchandise inventory and it is can get worse when the merchandises that the company receives contains several or many different types altogether.