How to Account for Shipping Costs: Journal Entries and Detailed Accounts

Shipping costs are an expense that directly affects the cost of goods and the company’s profit. Accurately and fully accounting for shipping costs not only helps with cost control but also ensures compliance with accounting regulations. In this article, 1Office will provide detailed guidance on how to account for shipping costs, including journal entries, accounts to use, and easy-to-apply examples.

1. What are shipping costs?

Shipping costs are expenses incurred during the process of moving goods or assets from the supplier to the company’s warehouse or place of use. These costs include primary transportation fees (such as vehicle rental, train tickets, airfare), loading and unloading costs, costs of preserving goods during transit, and other directly related expenses.

According to Vietnamese Accounting Standard 02 – Inventories (VAS 02), the cost of inventories is determined as the total of all reasonable costs incurred to bring the inventories to their present location and condition. The cost includes: 

• Purchase costs: Includes the actual purchase price of the goods, import duties (if any), shipping costs, unloading costs, transit insurance costs, etc.
• Conversion costs: Includes direct labor costs, direct material costs, and direct production overheads allocated to the product.
• Other directly related costs: Includes costs incurred directly to bring the inventories to their present location and condition, for example, product design costs for a specific order, product testing costs, etc.

Shipping costs are part of purchase costs and are included in the cost of inventories. Initially, shipping costs belong to the group of costs directly related to bringing an asset to a ready-to-use state and are included in the historical cost of the fixed asset. Therefore, shipping costs are recorded in the corresponding inventory or fixed asset account.

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2. How to account for shipping costs

According to Accounting Standard 03 – Inventories, shipping costs are divided into two main groups:

• Shipping costs as part of purchase costs: This group of costs is directly related to the purchase of goods and is included in the inventory value of the goods.
• Initial shipping and handling costs: This is the group of costs directly related to bringing a fixed asset to a ready-to-use state and is included in the historical cost of the fixed asset.

Shipping costs as part of purchase costs

When shipping costs are part of purchase costs, the business will have the following 3 accounting methods:

Initial shipping and handling costs

If a business purchases more than one item, the shipping costs must first be allocated to each type of item. Then, the accountant can proceed to record the separate costs for each item into their inventory value or original cost. Currently, accountants can choose one of 3 methods to allocate shipping costs, including:

• Allocation based on the value of the goods.

• • Determine the original cost (including purchase price and shipping costs) of each item/asset.
  • Allocate shipping costs to each item/asset based on the ratio of its original cost to the total original cost of all purchased items/assets.

Formula:

• Allocate based on the weight ratio of goods.

• • Determine the weight of each item/asset.
  • Allocate shipping costs to each item/asset based on its weight relative to the total weight of all purchased items/assets.

Formula:

• Allocate based on the proportion of goods quantity.

• • Determine the quantity of each item/asset.
  • Allocate shipping costs to each item/asset based on the ratio of its quantity to the total quantity of all purchased items/assets.

Formula:

3. Accounts Used for Recording Transportation Costs

In accounting, recording transportation costs involves various accounts. Correctly allocating these costs to the right accounts ensures that the business accurately reflects the nature of the expense, making financial reports transparent and easy to control.

Typically, accountants will use:

• Acct 111, 112: To record transportation costs paid in cash or by bank transfer.
• Acct 133: Input VAT deductible with a valid invoice.
• Acct 156: To include transportation costs in the value of inventory upon receipt.
• Acct 641: Transportation costs for goods sold are recorded as selling expenses.
• Acct 642: Transportation costs for general and administrative purposes.

Choosing the correct account helps ensure accurate and transparent cost allocation in financial statements.

4. How to Record Journal Entries for Transportation Costs in Different Scenarios

Transportation costs arise at various stages. If not recorded correctly, businesses can easily misstate expenses, leading to inaccurate financial reports. Here are some typical scenarios:

• Transporting purchased goods to the warehouse: This cost is added to the value of the goods. Journal entry:
  • Debit Acct 156: Value of inventory + transportation cost
  • Debit Acct 133: VAT (if any)
  • Credit Acct 111/112: Total payment
• Transporting goods sold to customers: This is a selling expense, not added to the cost of goods sold. Journal entry:
  • Debit Acct 641
  • Debit Acct 133
  • Credit Acct 111/112
• Transportation for general and administrative purposes: When costs are incurred for administrative purposes, record them in Acct 642.
• Hiring third-party transportation services with a VAT invoice: The accountant needs to also record an entry in Acct 331 (Accounts Payable) to reflect the payment obligation.

Each scenario directly affects the cost of goods sold, selling expenses, or administrative expenses, so accurate classification is crucial.

5. Examples of Journal Entries for Transportation Costs

To help accountants visualize, here are some practical examples:

• Example 1 – Transportation costs for purchased goods: A company purchases goods worth 100 million, incurs transportation costs of 5 million, with 10% VAT, paid by bank transfer.
  • Debit Acct 156: 105,000,000 VND
  • Debit Acct 133: 500,000 VND
  • Credit Acct 112: 105,500,000 VND

In this case, the transportation cost is added directly to the value of the inventory.

• Example 2 – Transportation costs for goods sold: A company sells goods and bears the transportation cost of 3 million, with 10% VAT, paid in cash.
  • Debit Acct 641: 3,000,000 VND
  • Debit Acct 133: 300,000 VND
  • Credit Acct 111: 3,300,000 VND

In this situation, the transportation cost is recorded as a selling expense, not added to the cost of goods sold.

The examples above show that although it’s all “transportation cost,” the accounting treatment can differ depending on the purpose for which it was incurred.

6. Key Considerations When Recording Transportation Costs

Recording transportation costs may seem simple, but errors can easily occur if accountants are not careful. Here are some key points to note:

• Valid supporting documents are required: The business needs VAT invoices, payment vouchers, or transportation contracts to substantiate the costs. Without proper documentation, the expense may be disallowed during tax finalization.
• Classify to the correct account: Transportation for purchased goods goes to Acct 156, for goods sold to Acct 641, and for administrative purposes to Acct 642. Using the wrong account will lead to inaccurate financial statements.
• Comply with tax regulations: Only valid invoices are eligible for input VAT deduction.
• Conduct periodic reviews: The business should compare monthly/quarterly transportation costs with revenue to detect any anomalies.
• Utilize software: Accountants should use an ERP or software like 1Office to automate journal entries and avoid errors from manual data entry.

Following these guidelines will help businesses optimize costs and mitigate risks during audits and tax finalization.

In the article above, 1Office has shared with you the proper way to handle accounting entries. We hope you can apply this knowledge in practice and bring benefits to your business.