What journal entry is recorded for the buyer when a buyer pays freight and the terms are FOB Shipping point?
The Correct Answer and Explanation is:
Journal Entry for Buyer Paying Freight (FOB Shipping Point)
Journal Entry:
Inventory (or Freight-In) XXX
Cash (or Accounts Payable) XXX
Explanation:
When goods are shipped under FOB (Free On Board) Shipping Point terms, ownership of the goods transfers from the seller to the buyer as soon as the goods leave the seller’s shipping dock. This means the buyer assumes responsibility for the goods during transit, including any shipping or freight costs.
In this situation, if the buyer pays for the freight, the cost is considered part of the total cost of acquiring inventory, not a separate expense. According to the matching principle in accounting and Generally Accepted Accounting Principles (GAAP), all costs necessary to bring inventory to its present condition and location should be capitalized. Therefore, the freight cost is added to the inventory account, increasing the value of the inventory on the balance sheet.
The journal entry typically debits the Inventory account (or a sub-account called Freight-In) and credits Cash (if paid immediately) or Accounts Payable (if paid later). This reflects that the buyer has incurred an additional cost to acquire the inventory, which will be matched with revenue when the inventory is eventually sold.
Using a concrete example: suppose a company buys goods for $10,000 FOB Shipping Point and pays $500 for freight. The buyer will make two entries:
1.
Inventory 10,000
Accounts Payable 10,000
Inventory (or Freight-In) 500
Cash (or Accounts Payable) 500
This ensures that the total inventory cost is recorded as $10,500, which will be used to calculate Cost of Goods Sold (COGS) when the inventory is sold. Properly recording freight under FOB Shipping Point ensures accurate inventory valuation and financial reporting.
