Navigating the accounting treatment of ocean freight invoices can be challenging for finance professionals. This guide provides step-by-step instructions to streamline your freight-related accounting processes.
1. Fundamental Knowledge: Subsidiary Account Setup
Before processing transactions, establish detailed subsidiary accounts categorized by product type, specifications, or other relevant criteria. Examples include "Inventory - Product A" and "Inventory - Product B" to track individual product costs.
2. Invoice Processing Methods
Upon receiving invoices, follow these accounting treatments based on purpose:
-
Office supplies purchase:
Debit: Administrative Expenses - Office Supplies
Credit: Accounts Payable -
General taxpayer receiving ordinary invoices:
Debit: Inventory
Credit: Cash/Bank (full amount included in cost as tax cannot be deducted) -
Received payment with issued invoice:
Record under "Main Business Income" or "Other Business Income" with corresponding VAT entries -
Received invoice without payment:
Debit: Inventory/Raw Materials
Credit: Accounts Payable
3. General Taxpayer Accounting Process
The standardized workflow includes:
- Preparing accounting vouchers from source documents
- Recording cash/bank transactions in journals
- Maintaining subsidiary ledgers
- Updating general ledger from summarized accounts
4. Transportation Documentation
Transportation vouchers serve as critical evidence for freight-related expenses. Maintain complete records to ensure transaction authenticity.
5. Invoice Verification Process
Accounting personnel must verify invoice authenticity (including online validation), confirm amounts match actual shipments, then prepare payment vouchers with accurate dates and sequential numbering.
6. Deductible vs. Non-Deductible Transportation Invoices
Deductible invoices include VAT input tax, while non-deductible amounts should be directly capitalized into raw material costs, significantly impacting tax liabilities.
7. International Freight Income Recording
For international freight income, debit relevant income accounts (e.g., "International Freight Income") and credit corresponding receivable accounts or cash/bank if prepaid.
8. Export Enterprises' Freight Accounting
Export companies should process ocean freight and insurance as follows:
-
Revenue offset:
Debit: Accounts Receivable
Credit: Main Business Income -
Freight invoice receipt:
Debit: Accounts Payable - Freight Forwarder
Credit: Main Business Income
9. FOB Price Determination
Use the FOB price listed on export invoices (including those issued by authorized agents). For other trade terms, deduct allowable transportation, insurance, and commission expenses from export revenue.
10. International Freight and Insurance Treatment
Deduct actual foreign currency-converted amounts for freight/insurance from export revenue using supporting documents, recording as negative entries in sales accounts.
11. Consolidated Port Charges
Common practice combines port charges, ocean freight, and insurance into single invoices issued by freight forwarders, typically showing total amounts.
12. Input Tax Deduction Considerations
Export purchases' input tax generally cannot be deducted. Domestic freight agency fees' VAT treatment varies by jurisdiction - consult local tax authorities.
13. Terminal Handling Charges (THC)
Standard THC rates apply per container (e.g., $470 per small container, $940 for two), though some carriers may charge differential rates.
14. Transportation Revenue Accounting
Record transportation income by debiting cash/receivables and crediting main business income. For received transportation invoices, allocate to appropriate expense accounts based on purpose.
15. Export Freight Accounting Treatment
Entry example:
Debit: Sales Expenses - Export Freight
Credit: Bank Account
16. Prepaid Freight Definition
Prepaid freight refers to transportation charges collected before service completion, either pre- or post-bill of lading issuance.
17. CIF Documentation Requirements
CIF shipping documents must display freight and insurance separately. Export invoices should itemize product value, freight, and insurance before showing total amount.
18. Customs Freight Accounting
Record export-related customs freight and port charges under sales expenses:
Debit: Sales Expenses - Freight
Credit: Cash/Bank
19. Prepayment Before Invoice Receipt
For advance payments without invoices, use prepayment accounts:
Initial payment: Debit Prepayments, Credit Bank
Invoice receipt: Debit appropriate accounts, Credit Prepayments
20. Transportation Costs in Procurement
Per accounting standards, transportation expenses should be capitalized into raw material procurement costs. Post-VAT reform, freight input tax no longer uses the 7% deduction rate.
21. Foreign Currency Freight Documents
Verify foreign currency freight documents against export invoice numbers, measurement tons, freight classes, and payment responsibility before processing through authorized foreign exchange banks at current selling rates.