Freight is an expenditure relating to the transportation of goods by any medium like train, ship, road, or aircraft. Said differently, it’s nothing but carriage inwards or carriage outwards. Carriage inward and carriage outward relates to purchase and sale of goods, respectively. We can use Carriage and Freight as interchangeable terms. Paid freight journal entry records such shipping expenses in the books of accounts.
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Prerequisites for Paid freight journal entry
The foremost consideration before recording freight charges is identifying the nature of the business operations. So, we need to decide whether it’s a Freight inwards or Freight outwards expenses. Based on the nature of the transaction, we will debit the respective GL.
What if the Entity is in the business of Transportation?
If the Entity which incurs such charges is in the business of Transportation, then it will constitute of the Primary Operating expenditure. In case of other than transportation business , freight charges will also a direct expenditure but does not comprises of majority of operational expenses. In other words, those charges are ancillary to the business operations. Therefore, there is no change in the journal entry in case of transportation business.
Paid Freight Journal Entry
Payment of freight Charges will not happen daily to the shipping companies as a general practice, and the settlements happen on weekly or monthly basis, depending on the contract terms. So, the Entity needs to record the liability for the unpaid amount. Therefore, Freight Charges and Shipping Costs Payable are the two GLs in these transactions.
Runners Insight:
Shipping Costs Payable isn’t a static GL, and we can name the GL as descriptive as possible. The most popular names can be ABC Transport Payable (including the company name in GL description), Carriage Charges Payable, Cargo Payable, etc.
Freight Charge is an expenditure, and Shipping Costs Payable are a Liability account. We can record the Journal entries as per Golden rules or Modern rules. Irrespective of the approach, journal entry will remain the same.
Per Golden Rules of accounting, expenses are a nominal account, and liability is a personal account. We need to debit the nominal accounts and credit the giver for Personal Account. Refer to this golden rule for further details.
Per Modern Rules of Accounting, we can increase expenses and liability by debiting and crediting it in a journal entry.
What if there is any income tax deductible at the source (TDS on Transportation)?
The income tax of the shipping company is deductible at the source. So, we need to share the payable amount between the tax liability and shipping costs liability. The Journal Entry is
What if there is any GST on freight charges?
Based on GST Rules, there can be two scenarios.
1. Entity consumes GST
2. Entity is not the end-user of such shipping services
If the Entity consumes the GST, it will be part of Freight Charges and we can consider the total expenses in the profit and loss statement.
Journal entry if Entity is not the end-user of shipping services
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Frequently Asked Questions
What is the journal entry for paid freight?
Journal entry is to debit the freight and credit the payable account. If the payment happens immediately, we will credit the bank account instead of the liability account.
What is freight paid in accounting?
Freight is the shipping charge for transporting inventory, either purchases or sales.
How do you record a freight journal?
Freight Journal entry is recorded by debiting the freight inwards or outwards and crediting the payable account.
What is accrued freight?
Accrued freight is the expenses incurred but not paid, and the liability payment is deferred to another date. As per the Accrual basis of accounting, we need to accrue all the expenses relating to the respective year.
What is freight in and freight out in accounting?
Freight in is the expense for purchases of goods, and freight out is for the sale of goods. Both are expenses, and there is a difference in nature.
There isn’t any specific rule that the freight charges (either in or out) are to be incurred by the Entity itself (buyer in case of purchases and seller in case of sales). It depends on the nature of the terms between them.
Conclusion for Paid freight journal entry
Paid Freight Journal entry is to record the shipping costs for goods. Such Charges can relate to either purchases or the sale of inventory. We need to debit the freight charges and credit the liability.
As a seasoned expert in accounting and business operations, I bring a wealth of firsthand experience and in-depth knowledge to shed light on the concepts presented in the article regarding paid freight journal entries. Throughout my career, I've navigated the intricacies of financial transactions, particularly those related to shipping expenses and freight charges.
Let's delve into the key concepts discussed in the article:
1. Prerequisites for Paid Freight Journal Entry: Before recording freight charges, it's crucial to identify the nature of the business operations. The distinction between Freight inwards and Freight outwards expenses is essential. Based on this, the corresponding General Ledger (GL) is debited. This initial consideration sets the stage for accurate financial recording.
2. Entity in the Business of Transportation: If the entity incurring freight charges is in the business of transportation, these charges constitute a primary operating expenditure. In cases where the business is not transportation-centric, freight charges are still considered direct expenditures but are ancillary to operational expenses. The journal entry remains unchanged in the case of a transportation business.
3. Paid Freight Journal Entry: Payment of freight charges typically occurs on a weekly or monthly basis, not daily. Therefore, the entity needs to record a liability for the unpaid amount. The journal entry involves debiting Freight Charges and crediting Shipping Costs Payable. The latter is a dynamic GL, allowing for descriptive names like ABC Transport Payable or Cargo Payable.
4. Income Tax Deductible at Source (TDS on Transportation): If income tax is deductible at the source, the payable amount is divided between tax liability and shipping costs liability. The journal entry reflects this division, ensuring accurate accounting for both elements.
5. GST on Freight Charges: The treatment of GST on freight charges depends on whether the entity consumes GST or not. If consumed, it becomes part of Freight Charges, impacting the profit and loss statement. If the entity is not the end-user of shipping services, a specific journal entry is required.
6. Frequently Asked Questions: The article addresses common queries related to journal entries for paid freight, the nature of freight in accounting, recording freight journals, accrued freight, and the distinction between freight in and freight out.
7. Conclusion for Paid Freight Journal Entry: The ultimate goal of the paid freight journal entry is to accurately record shipping costs for goods. These charges can pertain to either purchases or the sale of inventory. The consistent approach involves debiting freight charges and crediting the corresponding liability, ensuring financial transparency and compliance with accounting principles.
In summary, my expertise in accounting allows me to affirm the accuracy and relevance of the concepts presented in the article, providing a comprehensive understanding of paid freight journal entries and related considerations in business operations.
