Accounting for freight costs can be a head-scratcher. Does freight count as a selling expense or a laid down cost? Are freight expenses part of the item’s value, or does it come from an account all its own? Answering these questions correctly—and collecting the right kind of data in the process—can help you reduce accounting errors and inconsistencies.
Read on to learn more about how to avoid the five biggest mistakes companies make in freight accounting.
1. Confusing the Freight Expense Account with Cost of Sales-Freight
Freight accounting can be particularly complex because the freight expense can be recorded in several different ways, depending on the situation. Understanding the difference between freight-related accounts can help reduce mistakes and improve accounting accuracy.
Keep these guidelines in mind when recording freight expenses:
- Freight costs associated with inventory purchases should be recorded as Cost of Goods Sold when shipped via inbound freight from a supplier
- Freight costs associated with delivering goods to customers should be recorded as a selling expense (typically coming from the freight expense account)
- Freight costs associated with fixed assets should be included on the balance sheet as a laid down cost, i.e. part of the asset’s overall value (not typically coming from a separate freight account)
Mingling your freight costs with other expenses can affect your overall logistics data, which in turn affects the way you run your business. By keeping these categories clear, you can lay a solid foundation for data-based decision making.
2. Letting Freight Records Slip
Over time, it’s easy to let your diligent record-keeping slip. After a few months or years of incomplete records, an audit or a freight claim can bring these inconsistencies to light—and put freight accountants in a bad situation.
It’s crucial to keep freight accounting records clean and up-to-date at all times. Make sure to reconcile your balances and statements every month so you can spot errors or unusual account balances. In the event of a freight claim or legal action, your thorough accounting records (combined with the Bill of Lading) will help you make your case. Accurate records will also help you uncover opportunities to save money during a freight audit.
3. Inaccurate Cost Distribution
Many departments in your company are involved in the shipping process, which can blur the lines of budget responsibility for transportation spending—especially for freight, which is often a significant component of cost that drives profitability. Division owners, business unit owners, or product line owners may even have compensation or bonus targets that depend on accurate distribution of actual costs to the correct owners.
If your freight accounting process is manual, or performed by several different processes acting independently, the distribution of costs to responsible owners may be inaccurate. These inaccuracies crop up because of inaccurate estimates, inconsistencies between regions, or inconsistencies across fiscal periods. This can cause unexpected accrual and actual expense reporting that jeopardizes profitability objectives. It also makes it much more difficult to perform an accurate analysis of your transportation spend, which may lead you to miss out on opportunities to reduce waste and save money.
Modern transportation accounting systems can automatically assign freight costs directly to responsible owners, booking accruals and actual costs more accurately and precisely.
4. Going It Alone
Especially for a smaller business, it can be tempting for a business owner to try to reduce costs by handling the books themselves or passing them to an inexperienced employee. While this may save money in the short-term, it can result in major errors or oversights that cost more down the road. Inaccurate records can lead to unsuccessful freight claims, less favorable financing terms, and plenty of other unpleasant results.
An experienced accounting team—preferably one that understands the nuances of freight accounting—will save time, money, and headaches for years to come. In addition, modern freight settlement software can automate the payment process so your accounting department can focus on timely, accurate recordkeeping.
5. Holding Onto Legacy Manual Processes
Yesterday’s paper invoices and manual updates are giving way to a more automated, intelligent way of doing things. For an accounting department, holding onto “the way we’ve always done it” can mean errors and missed opportunities.
Modern freight management requires a more dynamic approach to accounting. Robust accounting software gives you the ability to:
- Eliminate paper handling and routing
- Reduce hours spent filing paper invoices
- Centralize freight invoice processing
- Archive invoice documents for future reference
- Reduce turnaround time for payment, documenting, and other internal processes
Learn More About Accounting for Freight
Freight accounting may be complex, but by avoiding these common mistakes, you can set yourself up for long-term success. Remember to revisit your statements and balances on a regular basis, and make sure your record-keeping processes set you up for sustainable growth.
For more information about freight billing and accounting for freight, download our ebook: Freight Billing: What It Is & 7 Costly Mistakes to Avoid.