6.5 Discuss and Record Transactions Applying the Two Commonly Used Freight-In Methods

Freight-In (Transportation Costs)

Freight-in (also called transportation-in) refers to the cost of shipping merchandise from the supplier to the business.

Key Point: Freight-in is part of the cost of inventory, not a separate expense.

Two Methods for Recording Freight-In

1. Include in Inventory Account (Preferred method)
2. Separate Freight-In Account (Alternative method)

Method 1: Include in Inventory Account

How it Works:

• Freight cost is added directly to the Inventory account
• No separate freight account
• Simpler and more direct

Example: Purchase €5,000 merchandise, paying €200 freight. VAT 17% on merchandise, freight may or may not have VAT.

Journal Entry:

321000 Inventory                   €5,200  (€5,000 + €200)
431000 VAT Recoverable              850   (on merchandise)
400000 Accounts Payable (or 510000 Cash)            €6,050
To record purchase including freight-in

Advantages:

• Simpler
• Freight is part of inventory cost
• No separate account to track
• Direct cost allocation

Disadvantages:

• Can't easily see freight costs separately
• May need to track if analyzing freight costs

Method 2: Separate Freight-In Account

How it Works:

• Freight cost recorded in separate account (605000: Freight-In)
• Transferred to Inventory or Cost of Goods Sold at period end
• Allows tracking of freight costs separately

Example: Purchase €5,000 merchandise, paying €200 freight separately.

Initial Purchase:

321000 Inventory                   €5,000
431000 VAT Recoverable              850
400000 Accounts Payable                        €5,850

Freight Payment:

605000 Freight-In (Class 6)        €200
510000 Cash (or 400000 Accounts Payable)            €200
To record freight-in cost

At Period End (or when calculating COGS): Transfer freight to inventory or include in cost of goods sold:

321000 Inventory                   €200
605000 Freight-In                              €200
To transfer freight-in to inventory cost

Or, if including in COGS directly:

602000 Cost of Goods Sold          €200
605000 Freight-In                              €200

PCN Account:

• 605000: Freight-In (Class 6 - Expense, but part of inventory cost)

Advantages:

• Can track freight costs separately
• Useful for analysis
• Can identify freight trends

Disadvantages:

• More complex
• Requires transfer at period end
• Extra step in accounting

Luxembourg VAT on Freight

VAT Treatment of Freight:

• Freight services typically have 17% VAT
• VAT on freight is usually recoverable (if for business)
• Must be recorded separately if different from merchandise VAT

Example: Purchase €5,000 merchandise (17% VAT) with €200 freight (17% VAT).

Journal Entry (Method 1):

321000 Inventory                   €5,200
431000 VAT Recoverable              918   (€850 + €34 on freight)
400000 Accounts Payable                        €6,118
To record purchase including freight with VAT

VAT Calculation:

• Merchandise VAT: €5,000 × 17% = €850
• Freight VAT: €200 × 17% = €34
• Total VAT: €884

Which Method to Use?

Use Method 1 (Include in Inventory) If:

• Simple operations
• Freight costs are relatively small
• Don't need to track freight separately
• Want simpler accounting

Use Method 2 (Separate Account) If:

• Need to analyze freight costs
• Freight is significant
• Want to track freight trends
• Multiple suppliers with different freight terms

Luxembourg Recommendation: Method 1 is generally preferred for simplicity, but Method 2 can be useful for analysis.

Freight-Out (Delivery to Customers)

Freight-Out (also called delivery expense) is the cost of shipping merchandise to customers.

Important: Freight-out is an operating expense, NOT part of inventory cost.

Example: Pay €50 to ship merchandise to customer.

Journal Entry:

618000 Delivery Expense (Class 6)  €50
510000 Cash                                      €50
To record freight-out (delivery expense)

PCN Account:

• 618000: Delivery/Transportation Expense (Class 6)

Note: Freight-out is an expense, not added to inventory or cost of goods sold.

Luxembourg Compliance Note

For freight-in in Luxembourg:

• Freight is part of inventory cost
• VAT on freight is usually recoverable
• Must be properly documented
• Can use either method (inventory or separate account)
• Must be included in inventory valuation for financial statements

Think It Through

A business purchases €10,000 merchandise and pays €500 freight. Should the freight be included in inventory cost or recorded as a separate expense? Why? What PCN accounts are involved?

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