What Is Freight Out and How Is It Accounted For?

Freight out is a common business expense, representing the cost a seller incurs to deliver goods to a customer after a sale. Understanding how to track and categorize this expense is important for accurate financial reporting and managing a business’s profitability.

Nature of Freight Out

Freight out refers to expenses associated with moving products from a seller’s facility, such as a warehouse or distribution center, to the buyer’s location. This cost is incurred after a sale and when goods are ready for dispatch. It covers all expenses the seller pays for shipping products to the customer.

These costs can include transportation fees, handling charges, and sometimes packaging materials specific to the outbound shipment. The amount spent on freight out varies with sales volume; as more goods are sold and shipped, the total freight out expense increases. Businesses must manage these costs to maintain profit margins.

Differentiating Freight Out from Related Costs

Distinguishing freight out from other shipping-related expenses is important for financial management. Freight in represents the cost a buyer incurs to receive goods from a supplier. Unlike freight out, freight in is part of the cost of acquiring inventory and is added to the cost of goods sold.

Another distinct item is shipping and handling fees charged to customers. While a seller might charge customers for shipping, this is revenue for the seller, not the actual expense incurred. The freight out expense is the amount the seller pays to the shipping carrier, which may be different from the amount charged to the customer. For instance, a “free shipping” promotion means the business still incurs a freight out cost, but the customer does not directly pay for it.

FOB, or “Free On Board,” terms clarify responsibility for freight costs and transfer of ownership. Under FOB shipping point, the buyer assumes responsibility for the goods, including freight costs and risk of loss, once goods leave the seller’s location. In contrast, under FOB destination terms, the seller retains responsibility for the goods and associated freight costs until products reach the buyer’s location. Freight out is incurred by the seller under FOB destination terms.

Accounting for Freight Out

Freight out is recorded as an expense on a company’s income statement. It is classified as a selling or operating expense. This classification reflects that freight out is a cost associated with selling and delivering products to customers, rather than producing or acquiring the goods.

It is not included in the Cost of Goods Sold (COGS), which accounts for expenses tied to the production or purchase of items for sale. Freight out is incurred after goods are ready for sale, making it a cost of distribution rather than inventory.

The journal entry to record freight out involves debiting an expense account, such as “Freight Out Expense” or “Delivery Expense.” A credit is made to either Cash or Accounts Payable, depending on whether the shipping cost was paid immediately or will be paid later. This expense is recognized when goods are shipped to the customer, aligning with revenue recognition for the sale.

Influence on Financial Reporting

Freight out impacts a company’s financial statements, particularly the income statement. As an operating or selling expense, it reduces net income. An increase in freight out costs, without a corresponding increase in sales or selling prices, can lower overall profit.

Its classification affects profitability ratios. Since freight out is an operating expense, rising freight costs can negatively impact profitability measures like net profit margin or operating profit margin. These ratios provide insights into a company’s efficiency in converting sales into profits.

On the cash flow statement, payment for freight out is categorized as an operating cash outflow, reflecting cash spent on daily operations. While freight out itself does not appear on the balance sheet as an asset or liability, its payment affects the cash balance or accounts payable liability.