Freight of Raw MAterial
This query is : Resolved
19 February 2009
freight of Raw material capitalise in Raw material....and the freight amount is not gone to purchase register....T.D.S is corrctly deducted
now the valuation of closing stock is included the freight Amt.....
whether this treatment is right???
now the valuation of closing stock is included the freight Amt.....
whether this treatment is right???
19 February 2009
First see in the trading a/c that whether they have made any entry in freight inward a/c or not?
If not than there may be chance that they had followed following practice.
Normally many companies add the cost of freight into raw material in order to have better control over cost and profitability of the product and passed the foll. entry:
Goods / Purchase a/c Dr. 90 (incl. freight, excise, ST, custom, etc.)
Freight inward clearing a/c Dr. 10 (provision for freight)
To Provisional liability a/c 100 (Provisional for creditors)
You can see at the time of making GRN they credit the amt with a provisional acc. like Freight inward clearing as at the time of GRN exact amount of freight may not be known they normally reverse the same at the time of booking of invoice by debiting freight inward account and credit the freight inward clearing account.
So first see whether they have reversed the same or not at the time of deduction of TDS if not than it is wrong and ask the same to auditee that why that had not debited the freight account as it is against the principal of materiality. Freight inward is a material item in the books of account.
If not than there may be chance that they had followed following practice.
Normally many companies add the cost of freight into raw material in order to have better control over cost and profitability of the product and passed the foll. entry:
Goods / Purchase a/c Dr. 90 (incl. freight, excise, ST, custom, etc.)
Freight inward clearing a/c Dr. 10 (provision for freight)
To Provisional liability a/c 100 (Provisional for creditors)
You can see at the time of making GRN they credit the amt with a provisional acc. like Freight inward clearing as at the time of GRN exact amount of freight may not be known they normally reverse the same at the time of booking of invoice by debiting freight inward account and credit the freight inward clearing account.
So first see whether they have reversed the same or not at the time of deduction of TDS if not than it is wrong and ask the same to auditee that why that had not debited the freight account as it is against the principal of materiality. Freight inward is a material item in the books of account.
21 February 2009
Goods / Purchase a/c Dr. (incl. freight, excise, ST, custom, etc.)
which freight amount is include in goods purchase..?????.
bcz u make the provision also..??
which freight amount is include in goods purchase..?????.
bcz u make the provision also..??
24 February 2009
Goods / Purchase a/c Dr. (incl. freight, excise, ST, custom, etc.)
which freight amount is include in goods purchase..?????.
bcz u make the provision also..??
which freight amount is include in goods purchase..?????.
bcz u make the provision also..??
25 July 2024
Based on your query, it seems you are concerned about the correct accounting treatment of freight charges related to raw materials, particularly in relation to capitalization of freight into the cost of raw materials and its impact on valuation of closing stock. Here's a breakdown of the relevant considerations:
1. **Capitalization of Freight Charges:**
- Freight charges incurred directly related to bringing raw materials to the business location are typically added to the cost of those raw materials. This is because these costs form part of the cost of acquiring the raw materials and bringing them into the condition and location suitable for their intended use.
- Therefore, when you capitalize freight charges into the cost of raw materials, you are increasing the value of your inventory (raw materials) by the amount of freight incurred.
2. **Accounting Entries:**
- When you purchase raw materials and incur freight charges, the accounting entries typically include:
- **Goods / Purchase Account (Dr.):** This account includes the cost of raw materials purchased, which would also include any freight charges directly attributable to those purchases.
- **Cash / Bank Account (Cr.):** This account is credited for the amount paid in cash or through bank transactions for the purchase including freight charges.
3. **Impact on Valuation of Closing Stock:**
- Including freight charges in the cost of raw materials affects the valuation of your closing stock. The closing stock value would reflect not only the cost of raw materials but also any additional costs (like freight) that were capitalized into the cost of those materials.
- This approach ensures that your inventory valuation accurately reflects the total cost incurred to bring the raw materials to the point where they are ready for use or sale.
4. **Provisions and Adjustments:**
- If there are any provisions related to freight charges (for example, if the actual amount of freight is estimated and provisioned for but not yet paid), these would typically be accounted for separately under provisions or accruals.
- Adjustments may be necessary at the end of the accounting period to ensure that all expenses, including provisions for expenses like freight, are correctly reflected in the financial statements.
**Conclusion:**
- The treatment of capitalizing freight charges into the cost of raw materials and including it in the valuation of closing stock is generally accepted and aligns with accounting principles.
- Ensure that the freight charges are directly related to the acquisition of raw materials and are correctly identified and included in the purchase cost.
- Seek advice from a qualified accountant or tax advisor to ensure compliance with accounting standards and tax regulations specific to your jurisdiction and business circumstances. They can provide guidance tailored to your needs and ensure accurate financial reporting.
1. **Capitalization of Freight Charges:**
- Freight charges incurred directly related to bringing raw materials to the business location are typically added to the cost of those raw materials. This is because these costs form part of the cost of acquiring the raw materials and bringing them into the condition and location suitable for their intended use.
- Therefore, when you capitalize freight charges into the cost of raw materials, you are increasing the value of your inventory (raw materials) by the amount of freight incurred.
2. **Accounting Entries:**
- When you purchase raw materials and incur freight charges, the accounting entries typically include:
- **Goods / Purchase Account (Dr.):** This account includes the cost of raw materials purchased, which would also include any freight charges directly attributable to those purchases.
- **Cash / Bank Account (Cr.):** This account is credited for the amount paid in cash or through bank transactions for the purchase including freight charges.
3. **Impact on Valuation of Closing Stock:**
- Including freight charges in the cost of raw materials affects the valuation of your closing stock. The closing stock value would reflect not only the cost of raw materials but also any additional costs (like freight) that were capitalized into the cost of those materials.
- This approach ensures that your inventory valuation accurately reflects the total cost incurred to bring the raw materials to the point where they are ready for use or sale.
4. **Provisions and Adjustments:**
- If there are any provisions related to freight charges (for example, if the actual amount of freight is estimated and provisioned for but not yet paid), these would typically be accounted for separately under provisions or accruals.
- Adjustments may be necessary at the end of the accounting period to ensure that all expenses, including provisions for expenses like freight, are correctly reflected in the financial statements.
**Conclusion:**
- The treatment of capitalizing freight charges into the cost of raw materials and including it in the valuation of closing stock is generally accepted and aligns with accounting principles.
- Ensure that the freight charges are directly related to the acquisition of raw materials and are correctly identified and included in the purchase cost.
- Seek advice from a qualified accountant or tax advisor to ensure compliance with accounting standards and tax regulations specific to your jurisdiction and business circumstances. They can provide guidance tailored to your needs and ensure accurate financial reporting.
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