Freight-Out

Freight-out, also called transportation-out, delivery expense or outbound freight, is the cost a seller pays to ship goods to its customers. It includes carrier charges, postage, courier fees and fuel surcharges on outgoing shipments. Because these costs are incurred after the goods are ready for sale and are part of the effort to sell and deliver them, they are not added to inventory. Instead, freight-out is recorded as an operating expense, usually within selling expenses, in the period the shipment is made.

Sellers usually bear freight-out when goods are sold under FOB destination terms, under which they keep ownership until the goods reach the buyer. The opposite case is freight-in, the transport cost a buyer pays to bring purchased goods in, which is capitalized as part of inventory cost. The existing entry on delivery expense covers the same cost from a general expense perspective.

When a seller pays for outbound shipping, it debits freight-out or delivery expense and credits cash or accounts payable. For example, an online furniture retailer ships a $2,400 sofa to a customer and pays a carrier $150. The sale is recorded by debiting cash or accounts receivable and crediting sales revenue for $2,400, and the shipping cost is recorded by debiting freight-out and crediting cash for $150. The sofa's cost, say $1,300, moves from inventory to cost of goods sold. Gross profit on the sale is $2,400 minus $1,300, or $1,100, and the $150 of freight-out then reduces operating income to $950 before other costs.

Many sellers bill customers separately for delivery. Under ASC 606 in US GAAP and IFRS 15, amounts charged to customers for shipping are part of the transaction price and are generally reported as revenue, while the related cost is reported as an expense. Companies may not simply net the two.

ASC 606 also allows a practical choice. If shipping and handling happen after the customer obtains control of the goods, as under FOB shipping point terms, a company can elect to treat them as a fulfillment cost rather than a separate service. It then recognizes all the revenue when control passes and accrues the expected shipping cost at the same time. Without this election, shipping after control passes could be a separate performance obligation, with part of the price deferred until delivery is completed. The policy chosen must be applied consistently and disclosed among the company's accounting policies.

Most companies include freight-out in selling, general and administrative expenses on the income statement, below gross profit. Some, especially online retailers, include outbound shipping in cost of sales, arguing that delivery is part of what customers pay for. Both approaches are used, so companies must disclose their classification, and analysts comparing gross margins between retailers need to check it. A business that moves shipping from selling expenses to cost of goods sold will show lower gross margin but unchanged operating income.

For e-commerce and distribution businesses, freight-out can be one of the largest operating costs, and it has grown as customers expect free and fast delivery. Companies manage it by negotiating carrier contracts, using zone-based pricing, setting minimum order values for free shipping, using regional warehouses to shorten delivery distances, and outsourcing through third-party logistics providers or drop shipping arrangements. Analysts often track freight-out as a percentage of sales to judge efficiency. Common accounting mistakes include capitalizing freight-out into inventory, recording customer shipping charges as a reduction of expense instead of revenue, and failing to accrue unbilled carrier invoices for shipments made before period end, which leaves expenses understated. Cross-border sellers also need to check which costs they bear under the agreed Incoterms rule.