How to Capitalize Inbound Freight Costs on Raw Materials into the Inventory Value
Adding the cost of shipping raw materials to the factory to the Raw Materials Inventory carrying value under IAS 2.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Raw Materials Inventory | Asset (+) | 300.00 | - |
| Cash / Accounts Payable | Asset/Liability (-) | - | 300.00 |
💡 Accountant's Note
Under IAS 2, all costs to bring inventory to its present location and condition must be capitalized.
Practitioner & Systems Framework
💻 ERP Architecture
IAS 2 requires that inventory cost includes all costs to bring it to its present location and condition: purchase price, import duties, inbound freight, handling, insurance, and other directly attributable costs. Set up a 'freight and duty' allocation in the ERP that proportionally distributes the inbound costs across the inventory items in a shipment (by weight, value, or volume). Allocating inbound freight as a lump-sum expense (rather than capitalizing) understates inventory and overstates the period's operating expenses. Track the landed cost per SKU for accurate product costing — the inbound freight element can be significant for imported materials (10–15% of purchase price for Jordan imports from Asia).
⚠️ Audit Flags
Auditors check that inbound freight and import duties are included in inventory cost — consistent expensing of these items understates inventory on the balance sheet and distorts cost of goods manufactured. The allocation basis for freight across multiple SKUs in a single shipment must be documented and consistently applied. For year-end, inbound freight accruals (goods received but freight bill not yet received) must be included in the GRNI accrual.
📄 Required Documentation
Freight invoice (carrier or forwarder), import duty assessment and payment receipt, allocation methodology (by weight, value, or volume), Raw Materials Inventory update per SKU, landed cost calculation (purchase price + freight + duty + handling), IAS 2 cost capitalization policy, and year-end GRNI accrual including freight.
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Expert Analysis by Qusai Ahmad
General Accountant Supervisor & IFRS Specialist
Specialized in SAP GUI automation and Middle Eastern tax compliance. Building digital tools for the next generation of finance leaders.