Shipping and Freight Costs as Expense or COGS?

bpetryak-gmail-c · ‎October 03, 2023

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?

Rainflurry · ‎October 04, 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.

View solution in original post

Rainflurry · ‎October 04, 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.

bpetryak-gmail-c · ‎November 03, 2023

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

Jonnybegood · ‎February 16, 2024

I have somewhat of the same issue. I buy floor heat cable and thermostats from a tile store in my installation business. Occasionally they will charge me freigth on a product which I pickup at their store. I then charge the freight to my customer. When I do a project P&L it shows up as income: why. I paid the freight to the company how do I expense it. It is a small amount (less that $300 per year). I don't really care to track it but I do want to account for it. Please give me you best advice. Also I am considering adding a one-time trip charge to my estimates to cover cost to pick up materials as my supplier is more than a hundred miles from me and most of my jobs. How to I add it and under what account(s) do I put it?

Thanks you

CarlSJ · ‎February 16, 2024

Hi there, Jonny. Allow me to share some steps to ensure accurate transaction records in QuickBooks Online (QBO).

You've possibly selected an income account when you created the Products & Services (Freight) item that's why it shows as an income when you do a project P&L. Therefore, you'll need to review the account used for that item (Freight) and change it to an expense account if it's income. You can follow the steps below:

Go to the Gear icon and select Products and services.
Locate the item and click Edit.
From the Income account ▼ dropdown, select the expense account to use.
Click Save and close.

Additionally, you can refer to this article for complete guidance: Change the account for a product or service item in QuickBooks Online.

Moreover, you can create a trip service item and choose the appropriate account to reflect it as an expense or income. If you want to show it as an expense, you can select an expense account, and if you want to show it as income, you can select an income account.

However, if you're unsure about which account to use, it's best to consult your accountant for guidance. If you don't have one, you can refer to these articles:

Furthermore, you can check out this article to learn how to organize your products and services in QBO: Group products and services into different categories in QuickBooks Online.

Feel free to reach out again in the Community if you have any further concerns. We're here to lend a hand. Keep safe.

Rainflurry · ‎February 17, 2024

@Jonnybegood

"I then charge the freight to my customer. When I do a project P&L it shows up as income: why. I paid the freight to the company how do I expense it. It is a small amount (less that $300 per year). I don't really care to track it but I do want to account for it."

It's revenue (gross income) because you charged your customer for it - no different than any other type of revenue. The freight charge from the tile store is a materials expense just like the floor heat cable and t-stats. If you pass through the freight expense to your customer (no markup), then the materials expense offsets the revenue and you have no net (taxable) income.

"Also I am considering adding a one-time trip charge to my estimates to cover cost to pick up materials as my supplier is more than a hundred miles from me and most of my jobs. How to I add it and under what account(s) do I put it?"

That's up to you. It's revenue to you so set up a 'Trip Charge' item or add it to your total job cost. Either way works as long as you assign the charge to an income account in QB.

Jonnybegood · ‎February 21, 2024

On my P&L there are category called "Other Income and Other Expenses." Would it be advisable to set up the Trip charge and Freight as other income and the freight charged by my supplier as "other Expenses.?" That way it is accounted for and kept separate from the revenue of my regular business activities?

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Shipping and Freight Costs as Expense or COGS?