How do you record shipping in accounting?

Recording Shipping Costs in Accounting: From Inventory to Expense

Shipping costs, often an overlooked element, play a crucial role in accurate accounting. Understanding how to correctly record these costs is essential for maintaining a clear financial picture and making informed business decisions. Essentially, shipping costs undertake a journey from the balance sheet to the income statement, transitioning from an asset to an expense.

When a business purchases inventory, any associated freight-in costs, meaning the cost of shipping goods to the business, are not treated as a separate expense. Instead, these costs are considered part of the inventory’s cost. This aligns with the principle of matching costs with revenues. The logic is that the cost of getting the inventory ready for sale is intrinsically linked to the inventory itself. Therefore, these shipping costs are added to the purchase price of the inventory and recorded as an asset on the balance sheet.

This capitalization of shipping costs as part of inventory has several implications. It increases the value of inventory on hand, influencing metrics like current assets and working capital. It also delays the recognition of the expense until the inventory is sold.

Upon sale of the goods, the associated portion of the capitalized shipping costs moves from the balance sheet’s inventory account to the income statement’s cost of goods sold (COGS). This transition effectively recognizes the expense associated with bringing those specific goods to market. This is where the matching principle comes into play again: the cost of acquiring and preparing the goods for sale is matched with the revenue generated from their sale in the same accounting period.

Methods for Allocating Shipping Costs to Inventory:

Several methods exist for allocating shipping costs to individual inventory items, including:

• First-In, First-Out (FIFO): This method assumes that the oldest inventory is sold first. Therefore, the shipping costs associated with the oldest inventory are the first to be expensed.
• Last-In, First-Out (LIFO): This method assumes that the newest inventory is sold first, leading to the expensing of the shipping costs associated with the most recent purchases.
• Weighted-Average Cost: This method calculates an average cost for all inventory items, including shipping, and applies that average to each unit sold.

The chosen method can impact COGS and, consequently, net income, particularly in periods of fluctuating shipping costs.

Shipping Costs for Customer Deliveries (Freight-Out):

It’s crucial to distinguish between freight-in (shipping to the business) and freight-out (shipping to the customer). Freight-out, the cost of shipping goods to customers, is treated as a selling expense and is expensed immediately on the income statement. This is because it’s directly related to generating sales and is not considered part of the inventory’s cost.

Proper Tracking is Key:

Maintaining detailed records of all shipping costs, both freight-in and freight-out, is essential for accurate accounting. This includes invoices from shipping companies, tracking numbers, and clear documentation of how these costs are allocated to inventory. Utilizing accounting software can significantly streamline this process and ensure accurate reporting.

By understanding the journey of shipping costs from balance sheet asset to income statement expense, businesses can maintain accurate financial records, make informed decisions, and comply with accounting standards.