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.
Table of Contents
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.
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
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.