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.
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.
Shipping accounting includes a focus on these components:
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.
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:
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.
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.
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.
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.
Shipping accounting brings numerous challenges for shippers to manage and overcome. These include:
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.
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.
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:
The right tools can provide significant benefits to shipping accounting, including:
Certain practices can streamline and maximize your company's accounting for shipping. These are some freight accounting best practices to follow:
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.
Set up a call with one of our experts to discuss how Intelligent Audit can help your business uncover opportunities for cost reduction and supply chain improvements through automated freight audit and recovery, business intelligence and analytics, contract optimization, and more.
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