Freight-in costs—the shipping expenses incurred to bring purchased inventory to your warehouse—are not just a logistics concern. Under Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), these costs must be capitalized as part of inventory cost rather than expensed immediately. Getting the journal entries right ensures accurate cost of goods sold calculations and prevents material misstatements on your financial statements.
What Is Freight-In?
Freight-in (also called "transportation-in" or "carriage inwards") refers to the shipping costs a buyer pays to have purchased inventory delivered from the supplier to the buyer's location. It is distinct from freight-out, which is a selling expense representing the cost of shipping goods to customers.
The accounting treatment matters because freight-in costs become part of the inventory's capitalized cost under both GAAP (ASC 330) and IFRS (IAS 2). This means freight-in flows through to the income statement only when the related inventory is sold—as a component of cost of goods sold—rather than being expensed immediately as a shipping cost.
Journal Entries for Freight-In Under Perpetual Inventory
Under a perpetual inventory system, inventory records are updated continuously with each purchase and sale. Freight-in costs are added directly to the Inventory account at the time of purchase.
Scenario 1: Freight-In Paid Separately by Buyer
A company purchases $10,000 of raw materials from a supplier on account, terms FOB shipping point (meaning the buyer bears the freight cost). The shipping company charges $350 for delivery, which the buyer pays directly.
Journal Entry — Perpetual System (FOB Shipping Point)
| Account | Debit | Credit |
|---|---|---|
| Inventory (Raw Materials) | $10,350 | |
| Accounts Payable | $10,000 | |
| Cash | $350 | |
| To record inventory purchase plus freight-in cost | ||
Notice that the inventory is debited for the total cost of $10,350—the purchase price plus freight-in. This ensures the inventory is carried at its full landed cost on the balance sheet.
Scenario 2: Freight-In Included on Supplier Invoice
When the supplier includes shipping on their invoice (common with FOB destination terms where the seller initially pays freight but may bill it separately), the entry is simpler:
Journal Entry — Freight-In Billed by Supplier
| Account | Debit | Credit |
|---|---|---|
| Inventory | $10,350 | |
| Accounts Payable | $10,350 | |
| To record merchandise purchase plus freight-in on supplier invoice | ||
Journal Entries for Freight-In Under Periodic Inventory
Under a periodic inventory system, purchases are recorded in a Purchases account, and the Inventory account is only updated at period end through a physical count. Freight-in is tracked separately in a Freight-In or Transportation-In account.
Scenario 3: Periodic System — Freight-In on Purchase
Journal Entry — Periodic System
| Account | Debit | Credit |
|---|---|---|
| Purchases | $10,000 | |
| Freight-In | $350 | |
| Accounts Payable | $10,350 | |
| To record inventory purchase and freight-in under periodic system | ||
At period end, Freight-In is closed to the Cost of Goods Sold calculation along with Purchases, Purchase Discounts, and Purchase Returns. The standard COGS formula under periodic inventory is:
Beginning Inventory + Net Purchases (incl. Freight-In) − Ending Inventory = Cost of Goods Sold
Freight-In vs. Freight-Out: Critical Distinction
One of the most common accounting errors is confusing freight-in with freight-out. They are fundamentally different:
| Characteristic | Freight-In | Freight-Out |
|---|---|---|
| Nature | Product cost (inventory) | Period expense (selling) |
| Income Statement Impact | Flows through COGS when sold | Immediate selling expense |
| Related Account | Inventory | Delivery Expense / Freight-Out |
| Shipping Terms | FOB Shipping Point (buyer pays) | FOB Destination (seller pays) |
| GAAP Treatment | Capitalize to inventory (ASC 330) | Expense as incurred |
Impact on Cost of Goods Sold and Gross Margin
Because freight-in is capitalized to inventory, it directly affects gross margin. Consider a retailer who purchases 1,000 units at $50 each plus $2,500 freight-in:
- Purchase cost: 1,000 × $50 = $50,000
- Freight-in: $2,500
- Total inventory cost: $52,500 ($52.50 per unit)
If the retailer sells 600 units at $80 each, COGS is 600 × $52.50 = $31,500 (not $30,000). The $1,500 difference is the freight-in allocation to sold units. Gross profit becomes $48,000 − $31,500 = $16,500—$1,500 lower than if freight-in had been expensed immediately. For businesses with significant shipping costs, this distinction materially affects both the balance sheet and income statement.
Practical Considerations for Small Businesses
Small businesses should implement clear procedures for capturing freight-in costs:
- Separate freight-in in your chart of accounts. Even under perpetual systems, using a Freight-In clearing account that is periodically allocated to inventory provides an audit trail and lets you monitor shipping cost trends.
- Allocate freight to individual inventory items. For bulk shipments containing multiple product types, allocate freight proportionally based on weight, volume, or value—document your methodology.
- Review inventory purchases procedures. Ensure your receiving process captures freight documentation so accounting has the numbers needed for accurate journal entries.
- Match freight-in to the correct period. If goods are received but the freight bill arrives later, accrue the estimated freight cost to match the expense with the inventory receipt period.
Tax Treatment of Freight-In
For U.S. federal income tax purposes, freight-in costs are treated consistently with book accounting under Internal Revenue Code §263A (UNICAP rules). Taxpayers must capitalize freight-in costs to inventory for tax purposes as well, meaning there is typically no book-tax difference for freight-in treatment. This contrasts with tax depreciation vs. book depreciation, which frequently creates temporary differences.
Mastering freight-in journal entries ensures your inventory is properly valued, your gross margins are accurate, and your financial statements comply with GAAP. For additional guidance on related topics, see our guide on journal entries for inventory adjustments and accounts payable processes for small businesses.
