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5 - Freight Costs - YouTube
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I'm Larry Walther and this is principles
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of accounting comm Chapter five we're
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continuing with the module on
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recognition issues for merchandising
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businesses specifically focusing this
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time on freight costs freight costs can
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be very significant it's not an
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immaterial cost to consider for many
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businesses so in negotiating a purchase
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and a purchase price one would typically
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also negotiate the freight terms which
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deal with the place of delivery when the
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risk of loss shifts from the seller to
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the buyer and who's to be responsible
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for the cost of shipping in North
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America
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we typically refer to this as fo B or
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free on board point which refers or
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represents the place where ownership
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transfer ship so let's see how this
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works and if the goods are FL B
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destination the seller needs to pay to
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get the goods to their destination
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here's a drawing our seller is in New
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York is paying the freight company and
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the goods are moved across the country
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to Los Angeles to be received by the
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buyer so I'm putting a check mark those
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freight costs are incurred by the seller
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if we turn this around and look at fo B
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shipping point then the buyer agrees to
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pay to get the gets to the destination
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so here the buyer is paying the freight
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company and the buyer is going to record
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the freight costs on their books we can
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have variations of this we can have FL B
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shipping point Freight prepaid in this
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particular case the seller is paying the
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freight company but expect to be
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reimbursed by the buyer because the
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terms are fo B shipping point at the
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point of shipment the goods belong to
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the buyer as does the obligation to pay
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for the freight the the transfer of cash
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from the seller to the freight company
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and in turn back to the from the buyer
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to the seller to reimburse that's merely
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an accommodation to the transaction but
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again the freight cost belongs to the
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buyer okay the term shipping point and
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destination are often replaced with
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actual areas such as fo B New York areas
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can be intermediate locations for
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example fo B st. Louis where we would
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say if the seller was in New York we're
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agreeing that the seller will get the
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goods to st. Louis at which point
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ownership shifts to the buyer at that
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point so that's a way of splitting the
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obligation for the freight
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let's look at the accounting for freight
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fo B destination the freight cost will
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be incurred by the seller
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it's called Freight out it's a selling
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expense that's B just subtracted from
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gross profit in arriving at net income
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and so let's look at the journal entry
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here there in addition to
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$7,000 sale debit accounts receivable
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and credit sale they're within that
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compound journal entry is a debit to
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Freight out and a credit to cash to
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represent the payment of the freight
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cost incurred by the seller
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the buyers entry for this transaction
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would merely debit purchases and credit
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accounts payable nothing is recorded
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relative to the freight since the buyer
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has no duty with respect to the freight
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if we turn this around and look at mo
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B's shipping point then we're going to
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have as $8,000 sale by the by the seller
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they'll record the account receivable
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and sale the buyer in their compound
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journal entry to record the $8,000
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purchase they'll also record the
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dispersment of $1500 for freight costs
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we have fo B's shipping point Freight
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prepaid it gets a bit more complicated
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here the seller has a $10,000 sales
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transaction but they're booking ten
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thousand four hundred in accounts
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receivable because they've also paid the
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freight company four hundred dollars
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that they are entitled to be reimbursed
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for by the buyer if we look at the
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buyers books the buyer is going to
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record Freight in is a four hundred
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dollar cost merchandise purchases the
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ten thousand dollar cost of the goods
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and reflect the ten thousand four
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hundred dollar payment the amount that's
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due to the seller
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notice that the seller's account
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receivable corresponds to the buyers
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accounts payable finally one question
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that will come up in your homework is do
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I get a cash discount on fight if I
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bought goods 2/10 net 30 I get a two
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percent discount for timely payment by
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by ten thousand dollars worth of goods
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and incur four hundred dollars of
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freight cost is my discount two hundred
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dollars two percent of ten thousand or
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is it two hundred and eight dollars the
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answer is its two hundred dollars you're
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not entitled to a discount on the
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freight terms
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