When goods are shipped between suppliers and customers, freight charges are incurred and must be expensed using the correct methodology, to remain consistent with U.S. Generally Accepted Accounting Principles. There are different classifications for freight out and freight in on the income statement. Below are details of each type of charge and how the expenses are treated.
When a manufacturer or supplier ships goods to a customer and is responsible for the freight charge, then the expense is considered freight out. This charge is considered an operating expense and is reported on the income statement in the operating expense section. Freight out charges may not be discernible, if using a single step profit and loss statement. However, a multi step statement makes it easier to track freight out.
When a customer receives freight and is responsible for paying the charges, it is considered freight in. If the goods are included in inventory, the expense is categorized as cost of goods sold and is reported beneath sales on the multi step profit and loss statement. On the single step statement, COGS is reported and can be analyzed, but its position on the financial statement is listed differently.
Freight In vs Out
When comparing freight in and out, the differences are clear. Suppliers must record an operating expense if they’re responsible for the cost, while customers may be able to include the cost in COGS. If a customer is not going to include the goods in inventory, then the cost must be expensed accordingly. When negotiating contracts, it’s important for buyers and sellers to ascertain the party responsible for shipping. Improper classification of freight in and out can distort the receiving company’s gross margin.
When shipping or receiving goods, its important to consider how the charges will be expensed on the income statement. When shipping goods to a customer, the charges are booked as an operating expense. When receiving goods, the charges are booked to cost of goods sold, if the goods are included in inventory.