Living Angels Christian Academy
SY 2021-2022
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT
ACCOUNTING FOR FREIGHT
Terms of Shipment
The cost of transporting goods from the seller’s place to the buyer’s place is shouldered by either
party depending on the arrangement. The merchandise can be transported either by a trucking
service, a shipping line, or an airline.
FOB Shipping Point means that the buyer should be the one to pay for the cost of transporting
the goods from the seller’s place to the buyer’s place. Once the merchandise leaves the seller’s
place for shipping, ownership of the goods is transferred to the buyer. Therefore, the buyer
shoulders the cost of transportation.
Example
Shizet Co. in Davao purchases merchandise from Joules Trading in Manila. Under the term FOB
Shipping point, Shizet Co. should pay the cost of transporting the goods from Manila to Davao.
Once the merchandise is delivered to the port in Manila for shipment to Davao, ownership of the
goods is transferred to Shizet Co.
FOB Destination means the seller should be the one to pay for the cost of transporting the goods.
This is because ownership of the merchandise is transferred to the buyer only when the
merchandise reaches the buyer’s place of business.
Using the previous example of Shizet Co. in Davao who purchases merchandise from Joules
Trading in Manila, under the terms FOB Destination, Joules Trading should pay for the cost of
transporting the goods from Manila to Davao. Ownership of the goods only transfers to Shizet
Co. once the goods reach Davao.
On the one hand, freight prepaid means the seller initially paid for the freight of the merchandise
upon shipment and freight collect means the freight company collects the cost of transportation
from the buyer.
In the example above, under the terms freight prepaid, the seller, Joules Trading, initially pays
the shipping company. On the other hand, under the terms freight collect, the shipping company
collects payment from Shizet Co.
Recording Freight Costs
The Different Transportation Costs
In accounting for the cost of freight charges, it is very important to note two questions: Who
should pay for the freight? And Who actually paid for it?
The different terms in accounting for freight charges incurred in transporting the merchandise
are as follows:
Terms of Freight
FOB Shipping point, freight collect
FOB Shipping point, freight prepaid
FOB Destination, freight collect
FOB Destination, freight prepaid
Who should pay for the freight
charges?
Buyer
Buyer
Seller
Seller
Who paid?
Buyer
Seller
Buyer
Seller
FOB Shipping Point, Freight Collect
FOB Shipping point, freight collect means that the goods are free on board up to the shipping
point and the freight company collects payment for the freight charges from the buyer. Since
ownership of the goods passes to the buyer once the goods reach the shipping point, the buyer
should be the one shoulder or pay for the cost of freight.
Illustration
Kookie Trading in Manila purchases goods from Tuttie Merchants in Davao on credit.
Freight charges amount t Php 5,000
Terms: FOB Shipping point, freight collect
Under the terms FOB shipping point, freight collect, the merchandise is free on board up to the
shipping point in Davao. The freight company collects the freight charges from Kookie Trading,
and Tuttie Merchants delivers the merchandise to the shipping port in Davao. Once the
merchandise is loaded to the carrier, ownership of the goods is thereby transferred to Kookie
Trading.
Journal Entries on the books of Kookie Trading to record the freight:
Freight-in
Cash
Paid freight charges
5,000
5,000
Journal entries on the books of Tuttie Merchants to record the freight:
There is no entry on the books of the seller. Tuttie Merchants, because Kookie Trading should
shoulder or pay the cost of the freight, and the freight company collected the freight charges
from Kookie Trading.
FOB Shipping Point, Freight Prepaid
FOB Shipping point, freight prepaid means that the goods are free on board up to the shipping
point, and the seller paid for the freight charges at the time of shipment. Because ownership of
the goods passes to the buyer once the goods reach the shipping point, buyer should be the one
to shoulder or pay for the cost of freight. However, since the seller paid for the freight at the time
of shipment, the buyer should reimburse the cost of shipment to the seller. The seller can debit
this as a receivable from the buyer.
Illustration
Kookie Trading in Manila purchases goods from Tuttie Merchants in Davao on credit.
Freight charges amount to Php 5,000
Terms: FOB Shipping point, freight prepaid
Under the terms FOB shipping point, freight prepaid, the merchandise is free on board up to the
shipping point in Davao. Tuttie Merchants delivers the merchandise to the shipping port in Davao
and pays for the freight charges. Since ownership of the goods is transferred to Kookie Trading
once the merchandise is loaded to the carrier, Kookie Trading should shoulder or pay for the
freight charges. Since Tuttie Merchants paid the freight charges upon shipment, Tuttie Merchants
can record this as a receivable from Kookie Trading. On the other hand, Kookie Trading should
record this as a payable to Tuttie Merchants.
Journal Entries on the books of Kookie Trading to record freight:
Freight-in
Accounts Payable
Cost of freight charges
5,000
5,000
Journal Entries on the books of Tuttie Merchants to record freight:
Accounts Receivable
5,000
Cash
Freight charges collectible from buyer
5,000
FOB Destination, Freight Collect
FOB Destination, freight collect indicates that the goods are free on board up to the destination
and the freight company collects payment for the freight charges from the buyer. Because
ownership of the goods passes to the buyer only when the goods reach the buyer’s place of
business, the seller should be the one to shoulder or pay for the cost of freight. However, since
the freight company collected the freight charges from the buyer, the seller should reimburse
the buyer for the amount of freight paid. The buyer, on the other hand, can reduce its accounts
payable to the seller for the cost of transportation paid to the freight company.
Illustration
Kookie Trading in Manila purchases goods from Tuttie Merchants in Davao on credit.
Freight charges amount to Php 5,000
Terms: FOB destination, freight collect
Under the terms FOB Destination, freight collect, the merchandise is free on board up to its
destination which is Manila. Ownership of the goods will only be transferred to Kookie Trading
once the goods reach Kookie Trading’s palce of business. Since the freight company collected the
freight charges from Kookie Trading, Tuttie Merchants should reimburse Kookie Trading for the
amount of freight it paid by decreasing its collectible from the latter. Kookie Trading, on the other
hand, can reduce its accounts payable to Tuttie Merchants for the cost of transportation paid to
the freight company.
Journal Entries on the books of Kookie Trading to record freight:
Accounts Payable
Cash
Paid freight charges
5,000
5,000
Journal Entries on the books of Tuttie Merchants to record freight:
Freight-out
Accounts Receivable
5,000
5,000
FOB Destination, Freight Prepaid
FOB Destination, freight prepaid means that the goods are free on board up to the destination
and the seller paid for the freight charges at the time of shipment. Because ownership of the
goods passes to the buyer only when goods reach the buyer’s place of business, the seller should
be the one to shoulder or pay for the cost of freight.
Illustration
Kookie Trading in Manila purchases goods from Tuttie Merchants in Davao on credit.
Freight charges amount to Php 5,000
Terms: FOB Destination, freight prepaid
Under the terms FOB destination, freight prepaid, the merchandise is free on board up to its
destination which is Manila. Ownership of the goods will only be transferred to Kookie Trading
once the goods reach its place of business. Tuttie Merchants delivers the merchandise to the
shipping port in Davao and pays for the freight charges.
Journal Entries on the books of Kookie Trading to record freight:
There is no entry on the books of the buyer, Kookie Trading, since Tuttie Merchants actually paid
for the freight as it should.
Journal Entries on the books of Tuttie Merchants to record freight:
Freight-out
Cash
Freight Charges
5,000
5,000
Comprehensive Illustrative Problem comparing buyer’s books and seller’s books in recording the
different terms of shipment:
Seller sold Php 200,000 merchandise to buyer.
Freight charges amounted to Php 3,000.
Terms: 3/10, n/60
Buyer’s Books
1. FOB Shipping point, Freight Collect
Purchases
200,000
Accounts Payable
200,000
Purchased merchandise on account
Freight-in
3,000
Cash
Paid freight charges.
Seller’s Books
1. FOB Shipping point, Freight Collect
Accounts Receivable
200,000
Sales
200,000
Sold merchandise on account
3,000
Analysis: The buyer, being the one responsible for the
payment of freight, actually paid for it. Freight cost is
not reflected in seller’s books.
2. FOB Shipping point, Freight Prepaid
Purchases
200,000
2. FOB Shipping point, Freight Prepaid
Accounts Receivable
200,000
Accounts Payable
200,000
Purchased merchandise on account
Freight-in
3,000
Accounts Payable
3,000
To record freight charges
Analysis: The buyer should be the one to pay for the
freight charges but seller paid the freight charges at the
time of shipment. To reimburse the seller, buyer
records the freight charges paid by the seller as
accounts payable to the seller.
3. FOB Destination, Freight Collect
Sales
200,000
To record sales on account
Accounts Receivable
3,000
Cash
3,000
Paid freight charges to be collected from buyer
Analysis: Seller records the freight charges paid as accounts
receivable from the buyer should be the one to pay for the
freight charges but the seller paid for it at the time of shipment.
3. FOB Destination, Freight Collect
Purchases
200,000
Accounts Payable
200,000
Purchased merchandise on account
Accounts Receivable
200,000
Sales
200,000
Sold merchandise on account
Accounts Payable
3,000
Cash
3,000
Paid freight charges to be shouldered by
seller
Freight-out
3,000
Accounts Receivable
3,000
Freight charges on sale of merchandise
Analysis: Seller should be the one to pay for the freight
charges but the shipper collected the charges from the
buyer. Buyer seeks reimbursement by reducing the
account payable to the seller.
Analysis: Since the seller should be the one to pay for the freight
charges but the shipper collected the charges from the buyer,
seller reimburses the amount of freight paid by the buyer by
crediting the accounts receivable from the buyer to deduct the
cost of freight charges from the amount collectible from the
buyer.
4. FOB Destination, Freight Prepaid
Purchases
200,000
Accounts Payable
200,000
Purchased merchandise on account
4. FOB Destination, Freight Prepaid
Accounts Receivable
200,000
Sales
200,000
Sold merchandise on account
Freight-out
Cash
Paid freight charges
3,000
3,000
Note: In FOB Destination, Freight Collect and FOB
Destination, Freight Prepaid, the account title FreightIn should not appear in the books of the buyer. This is
because the buyer is not shouldering the freight charges
in transporting the goods to his place of business.
Comprehensive Illustrative Problem
The following transactions are taken from the books of Zeus Boutique for the month of January.
Jan.
5
Zeus Boutique purchased merchandise from Circe Merchants, Php 100,000 on
account. Freight charges Php 2,000 FOB shipping point, freight collect.
Terms: 2/10, n/30
Purchases
Accounts Payable – Circe Merchants
100,000
100,000
Purchased merchandise on account
Terms: 2/10, n/30
Freight-in
Cash
To record freight charges
Analysis:
8
2,000
2,000
FOB shipping point means that the buyer should pay for the freight charges.
Freight collect means that the buyer paid the freight charges upon shipment of
the merchandise. A second entry is made to record the freight cost paid by the
buyer.
Cash purchases amount to Php 65,000. Freight charges Php 4,200 FOB destination,
freight prepaid.
Purchases
Cash
Cash purchases of merchandise
65,000
65,000
Analysis:
FOB destination means that the seller should shoulder the freight charges. Freight
prepaid means the freight company collected the freight charges from the seller.
No entry for freight is recorded in the books of the buyer since the freight charges
should be shouldered by the seller and the seller rightfully paid for it.
9
Zeus Boutique sold merchandise to Apollo Trading on account, Php 50,000. Freight
charges Php 2,500; FOB shipping point, freight prepaid.
Terms: 2/15, n/30
Analysis:
12
Accounts Receivable – Apollo Trading
Sales
Sold merchandise on account Terms: 2/15, n/30
50,000
Accounts Receivable – Apollo Trading
Cash
To record freight charges collectible from buyer
2,500
2,500
FOB shipping point indicates that the buyer should pay for the freight charges.
Freight prepaid means that the seller paid the freight upon shipment of the
merchandise. The second entry records the freight charges as accounts receivable
from the buyer since the buyer is the one responsible for shouldering the cost of
transporting the goods.
Granted Apollo Trading Php 3,000 allowance for defective merchandise sold.
Sales returns and allowances
Accounts Receivable – Apollo Trading
Granted allowance for defective merchandise
15
50,000
3,000
3,000
Zeus Boutique sold merchandise to Neptune Trading on account, Php 90,000.
Freight charges Php 3,600 FOB destination, freight prepaid.
Terms: 1/10, n/30
Accounts Receivable – Neptune Trading
Sales
Sold merchandise on account
90,000
90,000
Terms: 1/10, n/30
Freight-out
Cash
To record freight charges
Analysis:
15
3,600
3,600
FOB destination means that the seller should pay for the freight charges. Freight
prepaid means the seller paid the freight charges upon shipment of the
merchandise. The second entry is prepared by the seller to record the cost
shouldered by him/her in transporting the goods to the buyer’s place of business.
Zeus Boutique settled account with Circe Merchants in full.
Accounts Payable – Circe Merchants
Purchase discount
Cash
Settled account in full
Computation:
Amount of purchases
Less: Purchase discount
Php 100,00 x 2%
Cash Payment
16
Analysis:
17
100,000
2,000
98,000
Php
100,000
Php
2,000
98,000
Zeus Boutique purchased merchandise from Nyx Merchants on account, Php
32,000. Freight charges, Php 4,000; FOB shipping point, freight prepaid. Terms:
2/10, n/EOM
Purchases
Accounts Payable – Nyx Merchants
Purchased merchandise on account
Terms: 2/10, n/EOM
32,000
Freight-in
Accounts Payable – Nyx Merchants
To record freight charges shouldered by buyer
4,000
4,000
FOV shipping point means that the buyer should pay for the freight charges.
Freight prepaid means the seller paid the freight charges upon shipment of the
merchandise. The second entry records the freight charges as additional payable
to the seller by the buyer who is responsible for shouldering the cost of
transporting the goods.
Returned defective merchandise to Nyx Merchants, Php 2,000
Accounts Payable- Nyx Merchants
Purchase returns and allowances
Returned defective merchandise
18
32,000
2,000
2,000
Zeus Boutique purchased merchandise from Medusa Merchants on account, Php
60,000. Freight charges, Php 8,000; FOB destination, freight collect. Terms: 1/10,
n/30
Purchases
60,000
Accounts Payable – Medusa Merchants
Purchased merchandise on account
Terms: 1/10, n/30
60,000
Accounts Payable- Medusa Merchants
8,000
Cash
To record freight charges to be shouldered by the seller
Analysis:
20
Analysis:
23
FOB destination means that the seller should pay for the freight charges. Freight
collect means that the freight company collected the freight charges from the
buyer. The second entry is prepared by the buyer to deduct the freight charges
from the account of the seller since it should be shouldered by the seller.
Apollo Trading settled its account in full.
Cash
Sales Discount
Accounts Receivable – Apollo Trading
Collected account in full
48,560
940
Sales
Less: Sales returns and allowances
Balance
Less: Sales discount
47,000 x 2%
Net Sales
Add: Reimbursement of freight charges
Cash Settlement
50,000
3,000
47,000
Php
Php
49,500
940
46,060
2,500
48,560
Notice that the full cash settlement includes the reimbursement of freight charges
although it is not included in the computation of the sales discount. Freight
charges, although part of the buyer’s accounts payable to the seller arising from
the purchase transaction, are not included in the computation of the sales
discount.
Zeus Boutique settled its account with Nyx Merchants in full.
Accounts Payable
Purchase Discount
Cash
Full settlement of account
Purchases
Less: Purchase Returns and Allowances
Balance
Less: Purchase Discount
30,000 x 2%
Net Purchases
Add: Reimbursement of freight charges
Cash Settlement
Analysis:
8,000
34,000
600
33,400
Php
32,000
2,000
30,000
600
29,400
4,000
33,400
Notice that the total cash settlement includes the reimbursement of freight cost
paid by the seller but the purchase discount is computed based on the amount of
purchases only. Freight not included in the computation of cash discount.
24
Analysis:
27
Zeus Boutique sold merchandise to Sphinx Traders, Php 75,000. Freight charges
Php 7,000; FOB Destination, freight collect. Terms: 1/10, n/30
Accounts Receivable – Sphinx Traders
Sales
Sold merchandise on account. Terms 1/10, n/30
75,000
Freight-out
Accounts Receivable
Freight charges
7,000
7,000
FOB destination indicates that the seller should pay for the freight charges. Freight
collect means that the freight company collected the freight charges from the
buyer. The second entry is prepared by the seller to reimburse from the buyer
since freight should be shouldered by the seller.
Zeus Boutique sold merchandise to Poseidon Company, Php 111,000. Freight
charges Php 3,500; FOB Shipping point, freight collect. Terms: n/EOM
Accounts Receivable – Poseidon Co.
Sales
Sold merchandise on account. Terms: n/EOM
Analysis:
30
75,000
111,000
111,000
FOB shipping point means that the buyer should pay for the freight charges.
Freight collect means the freight company collected the freight charges from the
buyer. Since the buyer rightfully paid for it, there is no reason for it to be reflected
in the seller’s books.
Sphinx Traders settled its account in full.
Cash
Sales Discount
Accounts Receivable
Collected account in full
67,250
750
68,000
Computation:
Sales
Less: Sales Discount
75,000 x 1%
Net Sales
Less: Reimbursement of freight charges
Cash Settlement
Php
75,000
Php
750
74,250
7,000
67,250
Ong, Flocer Lao (2016). Fundamentals of Accountancy, Business, and Management. Quezon City: C&E Publishing, Inc.
Drill 1
Kuh Ting Enterprises received the following invoices from Bow Wow Trading. Determine the
amount to be remitted by Kuh Ting Entreprises to Bow Wow Trading under the following different
invoices.
20,000
Shipping
Point
Manila
Freight
Terms
FOB Cebu
Freight
Amount
3,000
15,000
Davao
FOB Davao
2,500
25,700
Manila
FOB Davao
2,000
36,000
Cebu
FOB Cebu
1,500
Invoice Price
Freight Paid
By
Kuh Ting
Enterprises
Kuh Ting
Enterprises
Bow Wow
Trading
Bow Wow
Trading
Full
Settlement
Drill 2
Bean Co., established by Mr. Bean himself, began business on Sept. 1, 2016. Selected transactions
for September related to its merchandising business are given below. Assuming you are the
bookkeeper of Bean Co., record the foregoing transactions.
Sept. 1
2
2
3
5
6
12
15
23
Mr. Bean withdrew Php 1,000,000 from his personal savings account and
deposited under the account of Bean Co.
Cash purchases of merchandise Php 100,000. FOB Shipping point, freight collect
Php 1,200
Sold merchandise for Php 25,000 to Bont Trading. Terms: 1/10, n/60. FOB Shipping
point, freight prepaid, Php 660
Cash sales to Coco Co. Php 7,000. FOB Destination, Freight prepaid, Php 550
Purchased merchandise from Menggay Co. List prices was Php 60,000 with terms
of 10-5 2/10, n/60 FOB Shipping point, Freight prepaid Php 2,000
Returned defective merchandise to Menggay Co., Php 1,000
Bont Trading settled its account in full.
Full settlement of account with Menggay Co.
Reimbursed Coco Co. for allowance granted on defective goods, Php 1,200