Freight Expense – Accounting explained

Freight expenses are also known as freight charges or freight rates. It is the amount paid to a carrier company for the transportation of goods from the point of origin to an agreed location.

An income statement contains many aspects of financial information, including specific costs that are sometimes hard to categorize. Freight charges are a typical expense for large companies, especially those involved in international business. L

Learning more about freight charges can help you determine the best ways to record and manage them in your accounting. In this article, we discuss the concept of freight charges, including freight out charges, how to record these charges, the difference between freight out and freight in, an example, and some additional terms.

Freight Expense

What is the Freight Expense

In accounting, the concept of a freight expense or freight spend account can be generalized as payment for sending out a product to a customer. It falls under the umbrella category of expenses and is treated like other expense accounts in relation to the accounting equation, however, under generally accepted accounting rules, if the freight is Freight expense has a normal debit balance.

Increases are recorded as debits while decreases are recorded as credits. In relation to other accounts, the Freight Expense account is similar to the “Cost of Sales-Freight” account, but are two totally different entities. While the Freight Expense account is increased for payments towards outgoing goods, the Cost of Sales-Freight account is increased for payments towards incoming goods.

How to Record Freight Expenses in Accounting

For businesses that ship cargo on a regular basis, freight expense will be a significant cost for the business. They must record it appropriately in order for their financial books to be accurate. Usually, freight expenses are recorded as other “general expenses.” How the cost is recorded may depend on who is paying the freight cost and whether the cost is included in the asset’s value/price.

Freight related terms

Here are some important freight related terms that can help you understand how to talk about freight out charges:

Free on board (FOB) shipping point

Free on board is an international trade term used to dictate whether the buyer or seller is liable for goods that are lost, damaged, or destroyed during shipping. When a free onboard shipping point is used, it indicates that the buyer takes responsibility for this liability the moment the goods are given to the shipping company. FOB shipping point means that the sale occurs at the shipping point, and the buyer pays for the shipment as a freight-in shipment. The goods legally belong to the buyer once the goods are placed at the shipping point.

Free on board (FOB) destination

Free on-board destination means the seller keeps the responsibility for the liability of goods until the goods are delivered to the buyer. This also means that the seller legally owns the goods and is responsible for the goods during the shipping process. The seller pays for the shipping, and the point of sale occurs when the shipment arrives at the buyer or its destination. Once the goods are delivered, the ownership of goods transfers from seller to buyer.

How to Record Freight Expenses
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Common Freight Costs and Freight Charges

Before Main Transit

Some of these charges may also apply after Main Transit.

  • Cargo Insurance
  • Customs Bond
  • Booking Fee
  • ISF Filing
  • Container Fumigation Fee
  • Pickup Fee
  • Customs Duty (at Origin)
  • Terminal Handling Charges
  • Security Surcharge
  • Congestion Surcharge
  • Consolidation Fee
Common Freight Costs and Freight Charges

Main Transit

  • Ocean Freight/Air Freight Charge
  • War Risk Surcharge
  • Bunker Adjustment Factor (BAF)
  • Currency Adjustment Factor (CAF)
  • Panama Transit Fee
  • Peak Season Surcharge

Destination

  • Customs Clearance Fee
  • Customs Duty (Destination)
  • Merchandise Processing Fee (MPF)
  • Harbor Maintenance Fees (HMF)
  • PierPass Charge
  • Alameda Corridor Surcharge (ACS)
  • Demurrage and Detention / Warehouse Fees
  • Telex Release/EDI Fee
  • Delivery Fee
  • Chassis Usage Fee
  • Container Cleaning Fee

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