Freight Out Is What Type of Account?

Freight out refers to the costs a seller incurs to deliver goods to customers. Properly categorizing these expenses helps businesses accurately reflect their financial performance, comply with accounting standards, and make informed operational decisions.

What is Freight Out?

Freight out represents the transportation costs paid by a seller to ship finished goods from their location to a customer after a sale has been completed. These expenses are distinct from costs associated with bringing goods into the business, known as freight in. Examples include charges from common carriers like FedEx, UPS, or the U.S. Postal Service for delivering products to a customer’s doorstep.

This cost arises when the seller is responsible for delivery, such as under “Free on Board (FOB) destination” shipping terms, where ownership transfers at the buyer’s location. Businesses often incur these costs as part of offering “free shipping” or fulfilling contractual agreements.

Classifying Freight Out: An Operating Expense

Freight out is classified as an operating expense. It is considered a selling or distribution expense because it directly relates to selling and delivering goods to customers, rather than producing or acquiring them. This classification aligns with generally accepted accounting principles (GAAP), which distinguish between costs of sales and operational costs.

While some companies might incorrectly include freight out in the Cost of Goods Sold (COGS), GAAP states that freight out is a selling expense. It supports sales activities and does not contribute to inventory value or acquisition. Other operating expenses include sales commissions and advertising. Properly categorizing freight out helps businesses accurately track costs associated with their selling efforts.

How Freight Out Affects Financial Statements

Freight out directly impacts a company’s financial statements, primarily the income statement. It is recorded below the gross profit line as an operating expense, often grouped with selling and administrative expenses. This means freight out reduces a company’s operating income and, consequently, its net income.

For example, if a company sells a product for $1,000 and incurs $50 in freight out costs, that $50 is subtracted from revenues after the cost of goods sold has been accounted for, contributing to the total operating expenses. From a cash flow perspective, freight out represents a cash outflow from operating activities, as it is a payment made to a third-party carrier for delivery services.