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bpetryak-gmail-c
October 4, 2023
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Shipping and Freight Costs as Expense or COGS?

  • October 4, 2023
  • 1 reply
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I took over accounting for a business where there was no real transition between the previous accountant and myself, so I am having to look into a lot of numbers on our monthly comparative P&L that the owners have questions about.

 

We have a freight company we work with to get both equipment the business uses, and products we sell to customers, shipped to us. Looking through past bills for them, all the shipping has been categorized as COGS: Shipping. Firstly, I'm wondering how any item can be charged to a COGS account before it's sold?

 

I clicked on on the category and typed in "Freight" to see what would come up; nothing did, so I opted to add it. When the window popped up, I picked from the drop-downs to create both these options: 

 

Option 1) Account Type: Expense, Detail Type: Shipping, Freight and Delivery

QB hint text reads:

"Use Shipping, freight & delivery to track the cost of shipping products to customers or distributors.

You might use this type of account for incidental shipping expenses, and the Cost of Goods Sold type of Shipping, freight & delivery account for direct costs.

This account is also available as a Cost of Goods Sold account."

 

Option 2) Account Type: Cost of Goods Sold, Detail Type: Shipping, Freight & Delivery - COS   

both say

QB hint text reads: "Use Shipping, freight & delivery - COGS to track the cost of shipping products to customers or distributors." (Also worth noting that the Detail Type actually says COS or Cost Of Sales, while all other descriptors refer to COGS)

 

So, each option says it can be used for the same thing, which I find more confusing.I'm trying to understand which we should use, and for what. We are a largely service based business, who happens to also purchase some products to sell to some customers. Should we even be keeping track of Shipping COGS, and what is the best way to do it?

Best answer by Rainflurry

@bpetryak-gmail-c 

 

"Firstly, I'm wondering how any item can be charged to a COGS account before it's sold?"

 

From a tax perspective. shipping charges from a vendor for inventory do not need to be capitalized if you're considered a small business taxpayer (less than $25M in annual revenue).  Therefore, they can be expensed to COGS immediately.  Freight charges for equipment that the business uses should be capitalized into the cost of the asset.

 

"Should we even be keeping track of Shipping COGS, and what is the best way to do it?"

 

It's up to you whether you want to expense it immediately to COGS or add it to the item's cost.  It's generally most advantageous to expense it immediately.  That's really up to you as long as you're considered a small business taxpayer. I was a controller for a couple of retail companies and we expensed the shipping to a separate Freight-In COGS account immediately because wanted to track our shipping costs separately from our product cost.  

 

Using the Shipping, freight & delivery expense account can be used for anything you ship as part of doing business.  As mentioned earlier, for shipping costs related to equipment purchased for use in the business, those costs should be added to the basis of the asset.     

   

1 reply

Rainflurry
RainflurryAnswer
October 4, 2023

@bpetryak-gmail-c 

 

"Firstly, I'm wondering how any item can be charged to a COGS account before it's sold?"

 

From a tax perspective. shipping charges from a vendor for inventory do not need to be capitalized if you're considered a small business taxpayer (less than $25M in annual revenue).  Therefore, they can be expensed to COGS immediately.  Freight charges for equipment that the business uses should be capitalized into the cost of the asset.

 

"Should we even be keeping track of Shipping COGS, and what is the best way to do it?"

 

It's up to you whether you want to expense it immediately to COGS or add it to the item's cost.  It's generally most advantageous to expense it immediately.  That's really up to you as long as you're considered a small business taxpayer. I was a controller for a couple of retail companies and we expensed the shipping to a separate Freight-In COGS account immediately because wanted to track our shipping costs separately from our product cost.  

 

Using the Shipping, freight & delivery expense account can be used for anything you ship as part of doing business.  As mentioned earlier, for shipping costs related to equipment purchased for use in the business, those costs should be added to the basis of the asset.     

   

    B
    bpetryak-gmail-cAuthor
    November 3, 2023

    Thank you so much for this reply. It was incredibly helpful!

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