The Guide to Freight Accounting and Allocation Management

Accounting is an important part of logistics and transportation management. To properly manage to ship, it's essential to keep up with shifting costs of carriers, modes, and other aspects of transportation. Shipping accounting can monitor and analyze costs to solve problems and find ways to save, creating more efficiency and streamlined spending. Freight in accounting is complex and requires a dedicated focus.

The following guide covers freight accounting and its role in managing overall transportation spend. You'll learn about various aspects of accounting for shipping, including components of freight accounting, challenges, allocation management, tools, and best practices that can help. Also, you'll find how Intelligent Audit's tools can provide better visibility into freight spend and help you better manage shipping accounting.

What Is Freight Accounting?

Accounting for shipping monitors expenses connected to the movement of products or goods from point A to point B. What is freight in accounting, and what does it include? Modern shipping is complex, so freight in accounting needs to consider factors like original and final destinations, mode of freight travel, and methods for receiving shipping fees from customers and recording freight costs.

Components of Freight Accounting

Shipping accounting includes a focus on these components:

What Is Freight In vs. Freight Out?

The most common types of freight accounting are freight in and freight out. Freight-in is a method where the buyer covers the freight costs, and these shipping fees are accounted for as part of a purchase. On the other hand, freight out means the seller covers the freight costs and accounts for them under business expenses.

For example, when a customer purchases a product, chooses the shipping method, and pays for the cost of shipping within the purchase transaction, this is an example of freight in. An example of freight out is Company A ordering a shipment of goods from Company B, where Company B (the seller) covers the shipping costs separately from the transaction and takes on the risk of the freight moving and arriving properly.

What Is Freight On Board?

Freight on board is also referred to as FOB or free on board. The International Chamber of Commerce coined this phrase to refer to which party (buyer or seller) is covering the shipping costs and when the purchase ownership officially transfers from the seller to the buyer. The following are the two types:

What Is Free on Board Origin?

Free on board origin, or FOB origin or FOB shipping point, refers to the situation of buyers covering the freight costs. This is often the case when companies send goods to retailers or vendors. In free onboard origin cases, sellers cover freight fees like taxes or customs fees before receiving goods.

What Is Free On Board Destination?

Free on board destination or FOB destination refers to the arrangement of the seller keeping ownership of goods and taking on the transportation risks until the point at which the goods reach the destination. At this point, the ownership transfers to the buyer. This setup is often the case for companies sending goods to a major shipping spot like a warehouse or port.

What Affects Freight Costs?

Freight in accounting includes numerous factors that impact costs. These include the transportation mode, such as airplane or truck, the load's weight, and continuously changing fuel costs. Other factors that play a role include high demand for certain carriers and regulations and risks associated with shipments. For instance, a shipment may need to go through bad weather or a dangerous area, increasing costs.

Why Is Freight Accounting Important?

Freight accounting offers opportunities for your company to save money by noticing areas where you may be able to modify or negotiate costs or otherwise switch modes or carriers. It may also show you ways to operate more efficiently, which can, in turn, save money.

Accounting that is proactive helps companies deal with challenges ahead of time and before they worsen, rather than reacting after the fact. Proactive freight accounting creates visibility of inaccuracies to solve and cut costs quickly. Further, freight accounting ensures that a company follows relevant regulations within its logistics practices and related accounting.

Challenges of Freight Accounting

Shipping accounting brings numerous challenges for shippers to manage and overcome. These include:

  • Time – Team members spend a significant amount of time and energy manually entering data associated with freight accounting and then additional time auditing that data. Large companies can face amounts of invoices that are difficult for any person or team to manage. Teams need to give additional time to convert different formats to a single data source.
  • Mistakes – With the sheer number of documents to enter and a lack of interest in data entry work, it's easy for human errors to occur. Many invoices contain errors, and data entry can introduce additional errors. These errors can lead to inaccurate charges and problems within shipper/vendor relationships.
  • Carrier Charges – Carrier charges and fees become complicated as shippers work with various carriers and types of shipping. It is often difficult to connect the right rates and accessorials to the correct carrier, shipment mode, and type of shipment.
  • Lacking Visibility – Shippers often do not have enough visibility into omnimodal transportation, which reduces the ability to optimize freight contracts properly.
  • SKU Proliferation – A downside of SKU proliferation is that it can complicate the accounting process for an individual and collective shipment order.
  • Item-Based Costs – It can be difficult to track item-based costs, which can get out of control when not properly recognized and recorded.

What Is Allocation Management in Freight?

With allocation, you assign product items to shipping orders and fulfill the order from warehouses, retail stores, or other fulfillment sites. Freight allocation involves planning to best use space by using all shipping options available. Freight allocation management could include consolidating loads, reviewing available routes, diversifying the carrier network, and using similar methods.

How to Allocate Freight Costs to Inventory

To allocate your freight costs, first, you calculate those freight costs. You take the prepaid freight amount and add a direct transport cost to determine the landed freight costs. A transportation management system (TMS) makes it easier to allocate freight costs to inventory.

Next, match the invoices that were paid to inventory. Automation makes it easier to achieve this process. Include accessorial expenses like labor loading and unloading, customs, fees, equipment rental, and other indirect costs. Allocating freight costs to inventory provides visibility that improves the management of freight costs.

What Tools Are Available for Improved Freight Accounting?

Tools improve the process of freight accounting, helping to automate, provide increased visibility, track and monitor expenses, and manage freight costs overall. Intelligent Audit offers logistics to finance and accounting tools such as:

  • SKU level analyses that show true shipment costs
  • Automated monitoring to clarify costs, remove surprises, and provide better insight
  • Real-time alerts that show discrepancies and suggestions
  • Data sets tailored to your company to provide more meaningful data
  • Analytics to track specific KPIs and improve financial management
  • Better business management tools that optimize payments
  • Machine learning to use historical and real-time data for forecasting
  • Logistics accounting tools that automate auditing, carrier payments, and more

The right tools can provide significant benefits to shipping accounting, including:

  • Detecting invoice errors.
  • Automating carrier payments.
  • Improving the bottom line and profits.
  • Creating more accrual and coding accuracy.
  • Providing real-time cost breakdowns.

Best Practices in Freight Accounting

Certain practices can streamline and maximize your company's accounting for shipping. These are some freight accounting best practices to follow:

  • System Integrations  –  It's important to monitor data across all carriers and platforms, which enables a centralized system for analysis and business intelligence related to freight expenses.
  • Real-time Tracking – Real-time notification helps you better track freight expenses, as some factors, like chargebacks, counteract expenses. Real-time data tracking provides a better idea of true payments.
  • A Single Source of Truth – Integrating auditing and payment processes through a secure payment resource is helpful. A single source of truth makes it possible to track activities and prevent problems.
  • Machine Learning – This technology can find discrepancies and allow you to address them quickly before the problems lead to significant amounts of unnecessary freight costs.
  • Outsourcing –  It is often difficult for shipper teams to track and manage freight expenses independently. It's easier to succeed with these processes by using a dedicated account manager who can help. Finding a trusted partner like Intelligent Audit helps shippers succeed in a secure way.

Improve Freight in Accounting With the Right Tools

The right tools and partners can help your company improve your freight spend visibility and logistics processes. Intelligent Audit can become a reliable partner that continuously looks for anomalies affecting your business. Our tools and services can help you manage transportation spend more proactively vs. reactively. Contact us to learn more.

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