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Maverick2
Level 6

Shipping costs - When is it COGS, when is it an Expense?

Prior to me doing some bookwork, people were using a non-inventory "Shipping" item on purchase orders. The item was tied to a COGS account.

 

This Shipping "item" was used for:

  1. Inbound freight on inventory
  2. Inbound freight on things like office supplies, shop supplies, shipping boxes, tools, equipment, etc. (not directly related to a product we sell).

#1 seems correct, #2 seems wrong and should be a regular expense account. In any case, "receiving" shipping against a PO is just weird and this should go in the expense tab on an item receipt or bill.

 

Additionally, this same COGS account was being used for USPS and UPS outbound shipping (shipping orders to customers). I think this is wrong too.

 

Advice from the accountants out there like @BigRedConsulting ? 

4 Comments 4
BigRedConsulting
Community Champion

Shipping costs - When is it COGS, when is it an Expense?

Cost of Goods Sold is generally used for expenses related to acquiring or otherwise preparing a thing that is then sold, recognized when the thing is sold, not when you purchased it.

 

Here is a good treatment: https://www.investopedia.com/terms/c/cogs.asp

 

Based on the article, you really shouldn't be recognizing the shipping expense you pay to receive goods as COGS until you actually sell those goods. One rather convenient way to do this in QuickBooks is to include the shipping part of a purchase in as part of the cost of the things purchased. So, if you bought 10 wigits for $100 each and also paid $50 in shipping, for a bill of $1050, enter the cost of each item as $105 and omit the shipping line item on the bill. This will increase your inventory asset account by $1050 instead of $1000, and increase the COGS automatically - when you sell each of those items, the point where COGS is supposed to be recognized.

 

The same thing is typically done for other surcharges and even sales tax paid that you're not going to get back for some reason.

Rainflurry
Level 13

Shipping costs - When is it COGS, when is it an Expense?

@Maverick2

 

Inbound freight on inventory can be expensed to COGS immediately if you are a small business taxpayer as defined by the IRS (<$25M annual sales).  

 

plumbr11
Level 1

Shipping costs - When is it COGS, when is it an Expense?

so where to put the freight if it is for a tool that you will be using for an infinite amount of jobs? Is it just part of the cost basis of the tool, or should it be debited against a seperate account?

Rudder Performance
Level 1

Shipping costs - When is it COGS, when is it an Expense?

Correct - freight for receiving the asset, crating/skidding the asset, rigging the asset into the plant, installation of the asset, etc. is all part of the cost basis of the asset. 

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