Freight expenses can be unpredictable and varied based on local or global events. Sometimes, businesses won’t even know freight costs until weeks after making a sale or purchase.
While there’s a lot of uncertainty riding on freight charges, there’s little mystery about what affects it. Let’s look at what impacts your freight costs and how you can record the cost of shipping goods on your financial documents.
Factors Affecting Your Freight Charges
Load
Your shipment, its size and weight factor into your charge. Your load impacts your carrier’s available space for other shipments. Plus, the heavier it is, the more fuel it requires. However, sometimes shipping many things at once and filling an entire vessel is the cheapest as opposed to a less-than-truckload (LTL) shipment.
Does your load require multiple kinds of transportation? Those changeovers add complexity and coordination, which drives up costs.
Demand
You’ll pay more to ship items when demand for freight services is high (August-October). Carriers with a lot of demand can sell space at a premium. January-March might be your cheapest time to ship.
Driver demand also determines freight expenses. Right now, there’s a high demand for truck drivers but a low supply. Trucking companies are increasing trucker salaries to attract workers, which means higher costs for you.
Destinations and Routes
Delivery to industrialized areas with easily accessible roads and docks typically reduces expenses compared to a large truck needing to reach a more convoluted residential area. Delivery between major city hubs is generally cheaper, too.
Fuel Costs
Carriers typically include the price of fuel in what they charge. As fuel prices rise, so do your shipping costs. Carriers may be unable to tell you your actual cost until they know the average fuel cost during transport.
Business Fluctuations
Carriers are more willing to contract with you and give you better pricing when they can count on your business. This requires you to reasonably predict your shipping needs. Variable shipping needs expose you to more fluctuating costs.
Government Policies
Local, national, and international policies may reduce your carrier’s capabilities or slow down their speed. Policies may restrict driving hours, prohibit nighttime freight travel, or limit the amount of goods trucks can move. Carriers may charge more to balance out their decreased productivity.
Environmental policies, like a pollution tax, can increase your costs, too. Pollution mitigation policies can slow freight travel, cause the carrier to pass the tax onto you, or both.
Safety Risks
You’ll pay extra for carriers to accept the increased risks or to take alternative, longer routes to deliver goods across areas of rising crime.
Freight Expenses and Accounting Methods
A knowledgeable business accounting firm can help you properly document your freight expenses according to Generally Accepted Accounting Principles (GAAP). For example, Freight Out and Freight In are classified differently on a Revenue Statement, but a single-stage Profit and Loss Statement wouldn’t distinguish between the two. Below are more details about freight and your accounting methods.
Freight Out
A Freight Out charge is what it costs to send out your goods. Freight Out is an operational expense you record on your Income Statement under Operating Expenses in a multi-step Revenue Statement.
Manufacturers, producers, and wholesalers incur major Freight Out costs as they regularly transport items to other firms and charge those firms for shipping.
Freight In
Many businesses, factories, and showrooms receive materials and supplies from other locations and incur regular Freight In expenses. These are what it costs you to transport products from a manufacturer or supplier to yourself.
The freight charges on your products are classified as Cost of Goods Sold (COGS) if you keep them in inventory and are recorded under Sales in your multi-step Profit and Loss Statement. A single-step Profit and Loss Statement also records COGS, but a bit differently. Ask your bookkeeping services professional if you need help.
Freight Charges on Accounting Statements
Businesses have four things to think about when recognizing their Freight Out charges on income statements:
1. When Freight Out Charges Occur
Organizations should record Freight Out charges at the time they occur. However, this could take a while as some Freight Out charges go unknown for some time. In those cases, the next best thing is to record Freight Out charges when you receive the invoice, regardless of when you incurred it.
2. Rolling Freight Out Expenses in Cost of Products
Freight expenses relate to the Cost of Goods Sold (COGS) because the more quantity you sell, the more you ship, and the higher your shipping costs. As a result, many companies include freight charges in with the COGS on their income statements to reflect freight fees.
Recording freight charges as part of COGS shows that freight costs are a variable expense related to the number of products you sell rather than a fixed operating expense. You can better plan for freight fees when you tie them to the products you sell rather than as a fixed cost.
3. Billing Consumers
Record freight costs under Accounts Receivables and Expenses on your Income Statement if you bill your customers for freight charges–you incur the costs, but your customer offsets part or all of the charges as soon as they’ve reimbursed you. Should your operations heavily rely on shipping goods, you may classify customer shipping invoices as revenue rather than a bill.
4. Free On Board (FOB) Terms
Free on Board (FOB) shipping terms refer to whether the customer or seller takes responsibility for products during shipping–products that could get lost, damaged, or destroyed.
FOB Shipping Point means that the customer assumes liability as soon as you release goods to the carrier company. For accounting purposes, the sale takes place at the shipping point, and the products are legally the buyer’s.
FOB Destination means the seller stays responsible for items until they are delivered to the customer. The seller pays freight costs and retains legal ownership until delivery. The point of sale occurs when the cargo arrives at its destination when ownership passes to the customer upon delivery.
Planes, Trains, Automobiles, and Accounting
Businesses have many accounting needs. Figuring out how to secure profitable shipping terms and correctly record freight costs are two of the many–and they can get complex. Find a knowledgeable accounting agency to help you do it better.
