These terms are frequently used in the import/export business to reflect the transportation costs associated with moving goods from one place to another.
Freight refers to the cost of transporting goods from vendor place to customer place. As the goods are coming into the business, this cost is referred to as freight in. On the other hand, freight out means the cost of dispatching goods to the customers. As the goods are being dispatched out of the business, this cost is referred to as freight out.
The nature of these expenses is different, so the accounting treatment and related concepts are different for these costs. Let’s go through the accounting aspects of these costs.
Freight is related to inward goods movement from the customer warehouse. So, the cost of transportation is added to the cost of inventory. In other words, this cost is capitalized as part of the inventory in the business balance sheet with the following journal entry.
| Description | Debit | Credit |
| Freight in (inventory) | XXX | |
| Bank/accounts payable. | XXX |
The debit impact of the given transaction is to capitalize the asset as inventory. This capitalization is removed from the balance sheet when inventory is sold to customers. On the other hand, the credit impact is to record bank payment or liability, depending on the business transaction under consideration.
So, the cost of freight remains on the business balance sheet until related inventory is sold to customers.
On the other hand, freight out is a selling expense for the business. This expense, also called delivery expense, is adjusted from gross profit when generating the business financial statement.
The following journal entry is posted when recording this expense.
| Description | Debit | Credit |
| Selling expense/freight out | XXX | |
| Bank/accounts payable. | XXX |
The debit impact of the given transaction is to record costs related to goods dispatched, which are adjusted in the gross profit. On the other hand, credit impact is the recording of cash payments or liabilities, depending on the transaction under consideration.
Conclusion
Freight refers to the cost of transporting goods on business premises. As the goods are received by business, we use the term freight in, this cost is capitalized in the business inventory and removed via cost of sales.
Freight out means the cost of dispatching the inventory out of the business. The expense is deducted from the business’s gross profit and is considered business expense.
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