As with other purchasing activities, any delivery costs paid by our company to receive our Inventory is kept in an account separate from our main Inventory account (Freight In). These costs eventually increase the value of our Inventory.
Well goods don't just show up on our doorstep right where they need to be delivered. So let's think of how that delivery expense could be accounted for in our inventory transactions so someone's gonna have to pay those shipping costs right? It's either gonna be the buyer or the seller. Someone's gonna pay for it and we call them freight costs here. When we talk about accounting that delivery expense we call them freight costs. Okay. It's just another way to say the same thing in a periodic system. We're gonna use a special account. We're not gonna debit inventory directly. Okay. What we're gonna do is we're gonna use this account freight in that's gonna hold all the value for all the delivery expenses that we had to pay to receive inventory. Okay. So the first type of situation is called the F. O. B. Shipping point. F. O. B. Stands for free on board. You don't really need to know that too much though. It's not a big deal. The queue here is this part the shipping point? Okay. And the whole deal with delivery is who owns the goods while they're in shipment, Does the buyer own them while they're on the truck or does the seller on them while they're on the truck? Okay. So when we talk about F. O. B. Shipping point, that means the ownership of the goods changed hands at the shipping point. Okay. So I like this little drawing that I do here, we've got the seller's warehouse. Then we have the delivery and then the buyer's warehouse. Bye. I'll just put buyer, right? So um when we talk about F. O. B. Shipping point. Well it's the ownership changes hands right here at the shipping point, right before the delivery happens. So that means that the buyer owns them during the delivery, right? The buyer is going to own it during the delivery. So the buyer is responsible for the shipping cost. Okay? So in this case the buyer pays the shipping costs and if you have to pay freight cost to receive your inventory. So think about it. If we didn't pay this freight cost, we wouldn't receive our inventory at all. Right, So this this cost is a necessary cost to receive our inventory. Well we're gonna include it in that account called freight in freight in. Okay. And this is an inventory sub account that increases the value of inventory for all the deliveries. Okay. So are all the delivery expenses that we pay I should say. Alright so let's check this this example out right here uh things on shelves, ordered 500 things at $5 per thing. The terms of the order? Our F. O. B. Shipping point. So that would be a situation like I've drawn above. Right? The buyer has to pay the delivery fee. In this case. We are the buyer, right? We are purchasing things. So we are responsible for this $35 charge from ups so let's see how we would account for this. The first thing we would have to do is find out what this inventory is worth 500 times $5 is 2500. Right? So this would go into our purchases in our periodic system. We increase purchases when we buy stuff 2500. And we bought it on account. Let's say it doesn't really say but let's say we bought it on account 2500. Right? That's the amount that we owe to our supplier. But what about the shipping cost in this case we have to pay for it. Right. Were the buyer and we have to pay the shipping cost? So we're going to debit our freight in. This is and this is basically an asset account related to our inventory account. So this is increasing the value of inventory at the end of the day, at the end of the period. So is gonna get $35. And let's just say accounts payable. We haven't paid ups yet. That could be cash if we paid ups and cash, whatever it is. This is increasing the value of our inventory basically. So these assets, the purchases is going to increase our assets by 2500 and the freight in Is increasing our assets by 35. Okay so both of those things are going to be what we say capitalized, we capitalize something when we make it an asset. The idea of saying something is capitalized means we're putting it on the balance sheet rather than into the income statement. Okay, so we're capitalizing that delivery expense into the value of inventory. Okay. The other side of this was the accounts payable, right? We had accounts payable That went up by 2500, and then they went up by 35 as well for the other payment. So this stays balance right. We're still balanced here. We're good. Cool. Let's pause here and then we'll discuss the other type of shipping in the next video.
Alright so we discussed fo be shipping point. Well let's see the similarities here. F. O. B. Destination. Now F. O. B. Destination, the ownership of the goods changes hands at the destination. Right? So if I draw the same little thing I did above we've got the seller then we've got the delivery and then it gets to the buyer's warehouse, right? So it goes from the seller's warehouse into the delivery truck and then to the buyer's warehouse. So here it's changing hands at the destination. So the good the ownership doesn't change until here. So in this case the seller pays the delivery fees. Right? So that's what we're exactly where we're gonna see here the seller is paying the delivery fees in a F. O. B. Destination situation. If you have to pay freight costs to sell your inventory. So this is a situation where making sales right? If we're making sales well this is a selling expense when we're making sales and we have to pay for delivery. Okay because we couldn't make the sale if we didn't make that selling expense. So let's see what happens here. T. O. S. Ordered 500 things at $5 per thing. The terms are F. O. B. Destination. Right? So notice in an F. O. B. Destination where the buyer in this case the buyer doesn't have to pay the delivery right? The seller pays the delivery. So we're good we don't owe any money to, we don't owe any money to ups our supplier is gonna have to pay ups. So we would make an entry for the 500 things at $5 a thing. We would make a purchase entry when we purchase those things purchases. 2500 with a debit and credit accounts payable for 2500. Right? We bought those things on account now what about the delivery fee? There's a $35 delivery fee but it's not coming out of our pocket so we don't care, we don't have to make an entry at all. There's no entry related to the delivery. Now on the seller's books, if we were talking about the seller, this is strictly hypothetical just so you know if we're talking about the sellers books they would make an entry for this delivery expense with some sort of thing like a a debit to selling expense. Right? That increases the expense by $35. And a credit to accounts payable or cash however they paid for it $35. Right, so the seller would take this expense on their books but on our books things, the shelves, this is the only entry. They make the purchase entry, there's no entry for the delivery. Alright so let's see what happened. The assets, the purchases went up, brought our assets up by 2500 and accounts payable also went up by 2500. So we're good. Right this equation still balances. Alright let's go ahead and move on to the next video