“Transportation-in” refers to the freight or shipping costs associated with receiving goods that a buyer has purchased. These costs are paid by the buyer, not the seller. Given that the buyer has to bear the costs to get the goods delivered to their location, these costs are added to the inventory value, as they represent part of the cost of acquiring the inventory.
From an accounting perspective, when the buyer pays for the shipping or freight costs of incoming goods, these costs are capitalized. This means that they are added to the asset’s cost (in this case, inventory) rather than being expensed immediately. By doing so, these costs are later included in the cost of goods sold (COGS) when the inventory is eventually sold, ensuring that the full cost of acquiring and preparing the inventory for sale is matched with the associated revenue.
For instance, if a bookstore purchases books from a publisher and has to pay for the shipping, the bookstore would add the shipping costs to the cost of the books in its inventory. This combined cost is then expensed as COGS when the books are sold.
In journal entry terms: When goods are purchased:
- Debit: Inventory (for the cost of the goods and the transportation-in costs)
- Credit: Accounts Payable or Cash (depending on whether it’s a credit purchase or a cash purchase)
It’s worth noting that “transportation-in” costs differ from “transportation-out” costs. Transportation-out, also known as delivery expense or freight-out, relates to the costs incurred by the seller to deliver goods to a customer. These costs are typically treated as a selling expense and are not added to the inventory value.
Example of Transportation-in
Let’s walk through a simple example of how “transportation-in” costs are recorded in accounting:
Imagine a retailer named “Elegant Furnishings” that purchases 100 chairs from a manufacturer for $100 per chair. The total cost of the chairs is $10,000. However, to have these chairs delivered to their store, Elegant Furnishings has to pay shipping costs of $500.
Recording the Purchase and Transportation-In Costs:
- Journal entry for the purchase of chairs:
Debit: Inventory $10,000
Credit: Accounts Payable $10,000
(Description: Recording the purchase of 100 chairs)
- Journal entry for the transportation-in costs:
Debit: Inventory $500
Credit: Accounts Payable or Cash $500
(Description: Recording the transportation-in costs for the delivery of chairs)
Now, the total cost of the chairs in the inventory account of Elegant Furnishings is $10,500 (which is $10,000 for the chairs themselves and $500 for shipping).
When Elegant Furnishings eventually sells these chairs, the cost of goods sold (COGS) will reflect the combined cost, ensuring that both the cost of purchasing the chairs and the cost of getting them to the store are matched with the associated revenue from the sale.
This example illustrates the process of capitalizing transportation-in costs, i.e., adding them to the value of inventory rather than treating them as a separate expense immediately. This approach ensures that financial statements accurately represent the full cost of inventory sold.