What Is Freight Out in Accounting?

Businesses regularly incur costs to move goods, whether bringing materials in or sending products out. These transportation expenses are a common part of commerce and directly impact a company’s financial health. Among these various shipping costs, “freight out” represents a specific expense businesses must understand for accurate financial reporting and strategic decision-making. This article defines freight out, details its accounting treatment, and distinguishes it from other related shipping costs.

Defining Freight Out

Freight out refers to the expense a seller incurs to deliver finished goods from their location to a customer’s designated destination. This cost arises after a sale and is integral to the selling and distribution process. Examples include shipping fees charged by carriers, delivery charges, postage, courier service fees, handling fees, and packaging materials directly tied to the outbound shipment.

The seller typically bears freight out costs, rather than the buyer. This is often the case when sales terms specify “Free On Board (FOB) Destination,” meaning the seller retains responsibility and ownership of the goods until they reach the buyer’s location. These expenses do not add to the product’s value or the inventory held by the seller. Instead, they are direct costs associated with fulfilling a customer’s order.

Accounting Treatment of Freight Out

In accounting, freight out is generally treated as an operating expense. This classification places it on the income statement, usually categorized under “selling expenses,” “delivery expenses,” or “transportation-out.” Under Generally Accepted Accounting Principles (GAAP), freight out is recognized as an expense in the same accounting period as the revenue generated from the sale of the goods, aligning with the matching principle.

Freight out is not typically included in the Cost of Goods Sold (COGS). While it impacts profitability, it does not directly relate to the cost of producing or acquiring the goods themselves. Proper classification distinguishes between the costs of bringing goods into a business and the costs associated with selling and distributing them. This distinction aids financial analysis, helping stakeholders accurately measure operating profit and understand the true cost of sales.

When a business incurs freight out, the common accounting entry involves debiting a “Freight Out Expense” or “Selling Expense” account and crediting “Cash” or “Accounts Payable,” depending on payment timing. This ensures the expense is properly recorded and matched against the revenue it helped generate. Misclassifying freight out, such as including it in COGS, can distort gross profit margins and lead to inaccurate financial reporting.

Differentiating Freight Out from Other Shipping Costs

Understanding freight out requires distinguishing it from other common shipping expenses, particularly “freight in.” The primary difference lies in the direction of the goods and who is responsible for the cost. Freight in refers to the costs a business incurs to receive goods, such as raw materials or inventory, from a supplier. These incoming transportation costs are considered part of the cost of acquiring the inventory.

Unlike freight out, freight in is capitalized, meaning it is added to the cost of the inventory on the balance sheet. When that inventory is subsequently sold, the freight in costs become part of the Cost of Goods Sold. This accounting treatment reflects that freight in is a necessary cost to get goods into a saleable condition and location. For example, if a business purchases goods under “FOB Shipping Point” terms, the buyer becomes responsible for the goods and associated shipping costs the moment they leave the seller’s location, making it a freight in expense for the buyer.

Differentiating freight in and freight out is important for several reasons. It ensures proper inventory valuation, as freight in directly impacts the recorded cost of assets. This distinction also leads to more precise financial reporting, allowing for a clearer understanding of gross profit versus operating profit. It also enables better analysis of a company’s profitability and helps in making informed decisions regarding pricing strategies and supply chain management.