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Accounting for Incurred Cost against a Contract

We have a contract in which we incurred freight costs against.  The agreement is that the partner will allow our company to deduct the amount of the freight costs from payments owed to them.  The payments are less than the incurred costs.  Can anyone provide some input on how to account for the incurred costs that remain?

Answers

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

I assume you mean that freight costs exceed the cost of the item(s) shipped. The excess cost after you reduce your payment to zero, should go to inventory, fixed assets, or expense, depending on the item you purchased and its accounting "destination".

(Agent, JKS Solutions, Inc.) |

Based on how you have worded your question, this raises a curious angle of potential vendor fraud. If the vendor is billing you for a freight estimate but you are paying the actual cost of shipping to your own contracted freighter, and the actual cost you incur is known to be lower than the estimate, it sounds like your vendor is making a profit on a fictitious invoice line item, but is worried that you have discovered it so they are allowing you to deduct your actual cost from the total amount.

Please call the vendor and ask them why they are not billing you for the actual cost of their shipper, and why you must pay additional shipping charges to your own freighter if the vendor is billing you for 100% of the cost. Your call may expose the fraud. If you get an AR clerk on the phone, ask to speak to their supervisor.

If they cannot backup their shipping estimate with an actual bill of lading from their shipper, its a fraud.

Ask yourself this question: Why would you need to pay your own shipper in addition to the cost of their shipper if the vendor is drop shipping to your location?

Even if you are paying an additional freighter company to move the goods from the original drop site to another, why would the vendor be estimating the costs of that activity in their original bill?

There would never be a need that I can think of to deduct the costs of any shipping I pay to a direct carrier from the total invoice of a supplier.

You will need to look into this for a kickback arrangement between your buyer and their sales team.

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