Need confirmation on Freight-In and Freight-Out tracking scenarios

cpizzullo-pizzyp · ‎April 19, 2024

Hi,

So I’ve researched (and researched) and think I have it down how we want to handle our freight-in and freight out situations, but want to get one last confirmation before we begin our first product shipments.

Shopify>A2X w/COGS>QBO Essentials (no physical inventory tracking software)
Some parts bought from China; all parts assembled/shipped from vendor in Michigan
Product is large so shipping to consumer is expensive and we want it tracked separately

Freight-In (parts from China; FOB Destination; example, $8,000 in item costs, $2,000 shipping)

Payment made up front so total of $10,000 simply categorized to Vendor Pre-Payments
Parts received, we plan on doing the following
- Debit “Inventory” for $8,000
- Debit “Freight-In COGS” for $2,000
- Credit ‘Vendor Pre-Payments’ for $10,000
Product sold, A2X COGS sync will do the following (note that we don’t have shipping costs in A2X Item Cost since we are splitting it as mentioned)
- Credit “Inventory” for $8,000
- Debit “Item COGS” for $8,000

All good, yes? Or should we have the $2,000 shipping portion be in 'Inventory' before COGs? (my research indicated that small biz could just go right to COGS. Is that correct?)

.

Freight-Out (free shipping to customer; example: total sale: $250, built-in shipping portion $50)

For sake of example, forget about fees for now, and assume qty of 1;
When product sold, A2X ‘sales’ sync>
- Debit ‘Shopify Clearing Account’ $250 (will be matched with bank acct later)
- Credit ‘Shopify Sales Income’ $250
We will then make manual JE as such to break out shipping portion of sales
- Debit ‘Shopify Sales Income’ $50
- Credit ‘Shopify Shipping Income’ $50
When product fulfilled, A2X ‘COGS’ sync takes care of Inventory like above
- Actual shipping charges from UPS will go to ‘Freight-Out COGS’

(remember from above, no shipping is included in A2X Item Cost)

Am I missing anything as far as freight scenarios?

Thank you!

Chet

Rainflurry · ‎April 23, 2024

@cpizzullo-pizzyp

I gave up trying to figure out why sometimes I don't get notified of replies. There is a checkbox when creating a reply/post that says "Email me when someone replies" but it doesn't seem to work 100% of the time. That's why I always tag the intended user.

I have never used A2X so I can't be of much help on that but I understand what you're saying. If your freight-in is included in your item cost on A2X, then, in order to capitalize the cost of freight-in, you would need to make an entry (after the A2X sync) to move it out of COGS and into the asset account (debit freight-in asset, credit COGS). I only brought up the best of both world options in order for you to see your true gross profit (revenue - COGS). With such large freight-in expense, you're going to look less profitable by expensing freight-in prior to selling the product. That's great from an income tax perspective, but not great for financial reporting if, at some point, you're looking for financing, investors, etc. If the timeframe between incurring the freight-in expense and selling the product is minimal, then maybe this is unnecessary.

Regarding freight-out, I have not seen any guidance that recommends including it in COGS. I have seen it recommended that it be included as part of Cost of Revenue, but that is different than COGS. It's an expense either way, so you have some flexibility on how you decide to track it. As a corporate controller for retail companies for 10 years, we tracked freight-in and freight-out separately from COGS (freight-in was a COGS sub-account). Again, it's really up to you but it seems that if both your freight-in and freight-out costs are a significant part of the cost of delivering thee product to your customer, I would want to see them separately because changes in those costs could have a big impact on your profit. In retail, we were only dealing with freight-in costs of 2-4% of product cost but I still wanted to see them broken out.

View solution in original post

Rainflurry · ‎April 19, 2024

@cpizzullo-pizzyp

"All good, yes? Or should we have the $2,000 shipping portion be in 'Inventory' before COGs? (my research indicated that small biz could just go right to COGS. Is that correct?)"

That all looks good to me and, yes, you can expense the cost of freight-in immediately instead of capitalizing it to inventory if you're considered a small business taxpayer by the IRS . Keep in mind, that is just from a tax perspective. From a financial accounting perspective, you will most likely show lower net income as a result of expensing freight prior to selling the product responsible for the freight. Another option is to post Freight-In to a separate inventory account so you can more accurately match your expenses with revenue - ideally you want to recognize the expense (item cost + freight cost) at the same time as the revenue for that item. You can then just expense that Freight-In inventory balance when you prepare your tax return. Best of both worlds IMO but that's up to you.

As far as freight-out is concerned, that all looks good except freight out is an expense, not part of COGS. So, it's not Freight-Out-COGS, it's just Freight Out expense.

cpizzullo-pizzyp · ‎April 22, 2024

Thanks @Rainflurry for the response! (sorry I just saw it today).

.

On Freight-In response: So while I fully try to understand your 'best of both worlds' portion, I had indeed thought of taking the easy way and just including that China shipping cost into the parts costs when it hits Inventory, and allowing A2X finished item cost to include that shipping portion so COGS would credit that Inventory accordingly in full, and be done with it. But, I figured, I would lose that visibility on 'China shipping freight-in'. So, if I do create a separate Inventory for this Freight-In shipping, and I want the A2X COGs sync (w/Item Cost now including this Freight-In portion), how would A2X be able to credit the 'Freight-In Inventory' account if it can really only credit the one during the sync? Am I missing something there? Maybe I'll get it after I think about it some more.
.
On Freight-Out: I have seen half of my research saying what you've indicated (it's just an expense) and the other half saying it SHOULD be COGS cause it's such a huge portion of our product sale price. Again, the product is large and heavy, and actual shipping could really be as much as 33% of our item costs, which is why I believe it should be COGs. Would love to hear your further opinion on this.
.
Again, thank you so much!
Chet
.
PS. Is there a reason I'm not getting notified of responses?? Hopefully you will see this.

Rainflurry · ‎April 23, 2024

@cpizzullo-pizzyp

I gave up trying to figure out why sometimes I don't get notified of replies. There is a checkbox when creating a reply/post that says "Email me when someone replies" but it doesn't seem to work 100% of the time. That's why I always tag the intended user.

I have never used A2X so I can't be of much help on that but I understand what you're saying. If your freight-in is included in your item cost on A2X, then, in order to capitalize the cost of freight-in, you would need to make an entry (after the A2X sync) to move it out of COGS and into the asset account (debit freight-in asset, credit COGS). I only brought up the best of both world options in order for you to see your true gross profit (revenue - COGS). With such large freight-in expense, you're going to look less profitable by expensing freight-in prior to selling the product. That's great from an income tax perspective, but not great for financial reporting if, at some point, you're looking for financing, investors, etc. If the timeframe between incurring the freight-in expense and selling the product is minimal, then maybe this is unnecessary.

Regarding freight-out, I have not seen any guidance that recommends including it in COGS. I have seen it recommended that it be included as part of Cost of Revenue, but that is different than COGS. It's an expense either way, so you have some flexibility on how you decide to track it. As a corporate controller for retail companies for 10 years, we tracked freight-in and freight-out separately from COGS (freight-in was a COGS sub-account). Again, it's really up to you but it seems that if both your freight-in and freight-out costs are a significant part of the cost of delivering thee product to your customer, I would want to see them separately because changes in those costs could have a big impact on your profit. In retail, we were only dealing with freight-in costs of 2-4% of product cost but I still wanted to see them broken out.

cpizzullo-pizzyp · ‎April 23, 2024

Thank you so much for thorough reply @Rainflurry ! It truly gives me plenty to rethink. Much appreciated!!

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Need confirmation on Freight-In and Freight-Out tracking scenarios