Journal entry for delivery of goods
Introduction
In business, we may need to pay for the delivery of goods for our customers or for goods from our suppliers to bring them to our place. In this case, we need to make the journal entry for the delivery of goods in order to account for the cash outflow from the business.
For the delivery of goods out to the customer or the freight-out cost, we can just charge it as a delivery expense to the income statement for the period. However, for the freight-in cost or delivery of goods in, we need to account for it as an additional cost to the purchased goods which will become the inventory on the balance sheet.
This is due to the cost of purchases should include any cost necessary to bring the goods to our place. And as inventory in the business may follow the periodic inventory system or the perpetual inventory system, the journal entry for delivery of goods in or the freight-in, in this case, for one system will be different from another system.
Journal entry for delivery of goods
Cost of delivery goods out or freight out
We can make the journal entry for delivery of goods when we deliver the goods to the customer by debiting the delivery expense account and crediting the cash account or accounts payable.
| Account | Debit | Credit |
|---|---|---|
| Delivery expense | XXXX | |
| Cash/accounts payable | XXXX |
In this journal entry, total expenses on the income statement increase as we charge the delivery cost to the expense on the income statement.
Of course, we can also use the term “freight out” instead of “delivery expense” in order to distinguish it from the freight-in cost. In this case, we can also make the journal entry for delivery of goods out or freight-out as below instead:
| Account | Debit | Credit |
|---|---|---|
| Freight-out | XXXX | |
| Cash/accounts payable | XXXX |
In this journal entry, the freight-out account is an expense account that is charged to the income statement for the period. Likewise, it is the same as the above journal entry as we only make an alternative record of the above since some companies may use the delivery expense account while others may have the freight-out account in their chart of accounts instead.
In either case, when it comes to the journal entry for the delivery of goods, we should not mix the cost of delivery of goods out or freight-out with the cost of delivery of goods in or freight-in.
This is because while the cost of freight-out is considered to be an expense that should be charged to the income statement directly, the cost of freight-in is considered as an additional cost of purchased goods that should include in the cost of the inventory goods itself.
Cost of delivery goods in or freight in
As mentioned, the freight-in cost is considered as an additional cost to the inventory purchase and should include in the cost of the inventory. Hence, when we pay for the delivery of goods in which is usually referred to as the freight-in cost, we need to consider whether we use the periodic inventory system or the perpetual inventory system.
This is due to the two systems having different treatments on the inventory in or out. Specifically, if we use the periodic inventory system, we only need to update the balance of the inventory periodically (e.g. once a year). On the other hand, if we use the perpetual inventory system, we will need to update the inventory balance every time there is an inventory in (purchase) or inventory out (sell).
Periodic inventory system
If we use the periodic inventory system, we can make the journal entry for delivery of goods with the debit of the freight-in account and the credit of cash account or accounts payable.
| Account | Debit | Credit |
|---|---|---|
| Freight-in | XXXX | |
| Cash/accounts payable | XXXX |
As we do not update inventory immediately upon purchase under the periodic inventory system, we cannot include the freight-in cost immediately to the cost of inventory. Hence, we use the freight-in account in this journal entry as a temporary account in which its normal balance is on the debit side.
This freight-in account is similar to the purchases account in which it will be cleared at the end of the accounting period when we calculate the cost of goods sold.
Perpetual inventory system
Under the perpetual inventory system, we will include the cost of delivery of goods in or freight-in into the cost of inventory immediately upon receiving the goods. Hence, there won’t be a need for a temporary account or the freight-in account here.
Likewise, the journal entry for delivery of goods in or freight-in cost will the will be the inventory in and the cash-out or accounts payable as we include the delivery cost into the cost of inventory goods.
| Account | Debit | Credit |
|---|---|---|
| Inventory | XXXX | |
| Cash/accounts payable | XXXX |
In this journal entry, there is no separate account, such as a freight-in account or delivery expense account as the cost of delivery of goods will include in the cost of purchased goods which is recorded as inventory on the balance sheet.
Delivery of goods example
For example, on January 31, we make a cash payment of $100 for the cost of goods delivery to one of our customers who are outside of the city. This $100 delivery cost is our responsibility as we have a free delivery promotion during January for the customer that purchases our merchandise goods for a certain amount upward.
In this case, we can make the journal entry for delivery of goods on January 31, by debiting the $100 amount into the delivery expense account and crediting the same amount to the cash account.
| Account | Debit | Credit |
|---|---|---|
| Delivery expense | 100 | |
| Cash | 100 |
In this journal entry, while the total expenses on the income statement will increase by $100, the total assets on the balance sheet will decrease by the same amount for the cost of the goods delivery on January 31.
Example 2:
For example, on February 1, we make a cash purchase of $5,000 merchandise goods from one of our suppliers. In addition to the purchase amount, we also pay $200 in cash for the delivery cost in order to bring the merchandise goods to our office.
We use the periodic inventory system to manage the merchandise inventory in our company and the $5,000 merchandise goods arrive at our place on the same day of purchase.
In this case, we can make the journal entry for the $200 cost of the delivery of goods as well as the purchase of the merchandise goods as below:
Delivery of goods:
| Account | Debit | Credit |
|---|---|---|
| Freight-in | 200 | |
| Cash | 200 |
Purchase of goods:
| Account | Debit | Credit |
|---|---|---|
| Purchases | 5,000 | |
| Cash | 5,000 |
In this journal entry for delivery of goods to our office, we separate the $200 amount of the delivery cost and record it in a separate account of the freight-in. This is because we use the periodic inventory system in which we do not need to update the balance of the inventory for the $5,000 purchase yet.
Example 3:
For example, assuming we use the perpetual inventory system instead of the periodic inventory system in example 2 above.
If this is the case, we can make the journal entry for the $200 cost of delivery of goods and the $5,000 cost of the goods purchased as below instead:
| Account | Debit | Credit |
|---|---|---|
| Inventory | 5,200 | |
| Cash | 5,200 |
In this journal entry, the $200 cost of delivery of goods is included in the cost of the purchased goods. Hence, the balance of our inventory here will increase by $5,200 after the purchase on February 1.