Financial Accounting Question?

Question

Okay, I took financial accounting a year ago and have fogotten a few things. My current accounting instructor asked our class if we knew

1. Is shipping included in price paid?
2. Is shipping ever considered an expense?
3. How do we account for shipping in journal entries?

Nobody could answer his questions so he made us search for the answers. They are due tomorrow. Unfortunately I sold my Financial Accounting book back to the bookstore last year because I needed the $. Now I wish I had it but can't afford to buy it back :( Please Help!

Answer 1

1. Is shipping included in price paid? (Assuming you're the purchaser)
Yes, if the terms are FOB Shipping Point. No if they are FOB Destination.

2. Is shipping ever considered an expense?
Yes, if you're the seller and the terms are FOB Destination. They are selling expenses and are part of Selling, General & Admininstrative expenses

3. How do we account for shipping in journal entries?
If you're the purchaser and the terms are FOB Shipping Point:
(a) Using the periodic inventory system:
Dr Purchases xxx
Cr Cash/A/cs payable xxx

(b) Using the perpetual inventory system:
Dr Merchandise inventory xxx
Cr Cash/A/cs payable xxx

If you're the purchaser and the terms are FOB Destination, the question is irrelevant cos you're not bearing the shipping charges.

If you're the seller and the terms are FOB Shipping Point, the question is irrelevant cos you're not bearing the shipping charges.

If you're the seller and the terms are FOB Destination,
Dr Selling expenses - transportation out xxx
Cr Cash/A/cs payable xxx

Answer 2

1) The shipping expense is sometimes paid by the seller and included in the invoice under terms, (FOB shipping point) as a courtesy to the buyer. It is the buyers responsibility and must be reimbursed to the seller.

2) Shipping is considered an expense to the seller under terms, (FOB destination point). This is the sellers expense and would be classified as transportation-out, freight expense, transportation expense, etc.

3) To the seller, shipping is considered and recorded as an expense.
To the buyer, the shipping expense is included in the merchandise inventory account, and considered part of the inventory cost.

Note: I assumed this to be the perpetual inventory system.
Transportation expense, for the buyer, under the periodic inventory system is handled differently.

Answer 3

including shipping depends on the sales terms. If something is purchased FOB shipping point then shipping is the responsibility of the buyer. If it is sold FOB destination then it is included in the cost of the purchase.

Shippment of sold goods would be recorded as an expense. Shipment of goods received for sale (i.e. inventory) would be capitalized into inventory and expensed as cost of goods sold.

The journal entry would be:

Dr. Freight Expense
Cr. Cash (or A/P)

Answer 4

Cost accounting is the accounting associated with the cost of producing your product. Financial accounting is the most general, it mainly focuses on accounting outside the company such as for taxes and auditing. Managerial accounting is more internal and is used mostly for making decisions about which direction to take a business.

Answer 5

Our invoices come with shipping on the invoice so it is part of the cost to us.
Shipping would be an expense if you paid to ship something
Paying shipping would be
Debit Shipping
Credit AP or Cash