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Q. Understand how to account for transportation costs?
FOB terms are particularly important at the end of an accounting period. Goods in transit after that belong to either the seller or the buyer, and one of these parties must include these goods in its ending inventory. Goods shipped FOB destination belongs to the seller while in transit as well as the seller includes these goods in its ending inventory. Goods shipped FOB shipping point belongs to the buyer while in transit as well as the buyer records these goods as a purchase and includes them in its ending inventory. For instance assume that a seller ships goods on 2009 December 30 as well as they arrive at their destination on 2010 January 5. If terms are FOB destination the seller comprise the goods in its 2009 December 31 inventory and neither seller nor buyer records the exchange transaction until 2010 January 5. If terms are FOB shipping point the buyer comprise the goods in its 2009 December 31 inventory as well as both parties record the exchange transaction as of 2009 December 30.
Occasionally the seller prepays the freight as a convenience to the buyer even though the buyer is eventually responsible for it. The buyer simply reimburses the seller for the freight paid. For instance assume that Wood Company sold merchandise to Loud Company with terms of FOB shipping point freight prepaid. The freight indict were USD 100. The following entries are essential on the books of the buyer and the seller
Such entries are essential because Wood initially paid the freight charges when not required to do so. Therefore Loud Company must reimburse Wood for the charges. If the buyer pays shipment for the seller (e.g. FOB destination, freight collect) the buyer merely deducts the freight paid from the amount owed to the seller. The subsequent entries are necessary on the books of the buyer and the seller
Purchase discounts may be taken merely on the purchase price of goods. Thus a buyer who owes the seller for freight charges can't take a discount on the freight charges owed even if the buyer makes payment within the discount period.
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