Freight-In

Freight-in, also called transportation-in or inbound freight, is the cost a buyer pays to have purchased goods delivered to its warehouse, store or factory. It typically includes carrier charges, fuel surcharges, and sometimes handling and insurance in transit. Because these costs are necessary to get inventory into a condition and location ready for sale or use, accounting standards treat freight-in as part of the cost of the goods themselves, not as an ordinary operating expense.

A buyer usually pays freight-in when goods are bought under FOB shipping point terms, meaning ownership passes to the buyer when the seller hands the goods to the carrier. Its counterpart is freight-out, the cost of shipping goods to customers, which is paid by the seller and treated as a selling expense. The difference matters because it decides whether a shipping cost affects gross profit or only operating expenses.

Under the cost principle, an asset is recorded at all costs needed to acquire it and prepare it for its intended use. For inventory, US GAAP (ASC 330) and IFRS (IAS 2) both include purchase price, import duties and non-refundable taxes, and transport and handling costs directly attributable to acquiring the goods, less trade discounts and rebates. Freight-in is therefore capitalized into inventory and flows into cost of goods sold only when the goods are sold.

Companies record freight-in in one of two ways. Under a perpetual inventory system, it is usually debited straight to the inventory account. Under a periodic system, it is often collected in a separate freight-in account so the business can monitor shipping costs, and then added to purchases when calculating cost of goods purchased.

A clothing retailer buys $20,000 of jackets on credit, FOB shipping point, and pays a trucking company $800 to deliver them. Using a periodic system:

• Purchases is debited and accounts payable credited for $20,000.
• Freight-in is debited and cash credited for $800.
• If the retailer also takes a $400 purchase discount for paying early, cost of goods purchased is $20,000 minus $400 plus $800, which equals $20,400.

If opening inventory was $5,000 and closing inventory is $6,120, cost of goods sold is $5,000 plus $20,400 minus $6,120, which is $19,280. The freight has been spread between goods sold and goods still on hand, roughly in proportion to how much of the shipment remains. Each jacket carries a share of the delivery cost: if the order was 400 jackets, each costs $50 plus $2 of freight, or $52 before any discount.

On the income statement, freight-in does not appear as its own line in most published statements; it is buried within cost of goods sold. Internal management reports often show it separately because shipping costs can rise quickly with fuel prices or tight carrier capacity.

Common errors include:

• Recording freight-in as an operating expense, which understates inventory and cost of goods sold and overstates gross margin while understating operating profit.
• Confusing freight-in with freight-out, which should never be included in inventory.
• Forgetting to capitalize freight on goods still in transit or unsold at period end.
• Including abnormal costs, such as storage fees after goods arrive or penalty charges for late collection, which standards generally require to be expensed.

For imported goods, freight-in can be a large share of total cost and is often combined with customs duties, brokerage and insurance into a "landed cost." Importers usually rely on a freight forwarder and must read the Incoterms rule in their contract to know which transport costs they bear. Recording landed cost accurately is essential for pricing decisions, since understating it leads to products being sold for less than they truly cost. The details sit on the commercial invoice and bill of lading.