“Freight out,” also known as delivery expense, is the cost incurred by a seller to transport goods to a customer after the sale has been made. In other words, it’s the cost of delivering the finished goods from the seller’s location to the buyer’s designated location.
The treatment of “freight out” cost differs from “freight in.” While “freight in” is considered part of the cost of goods sold (COGS), “freight out” is typically classified as an operating expense and is recorded on the income statement under selling expenses.
The way “freight out” is handled can vary depending on the shipping terms of the sale. If the terms are FOB shipping point (or FOB origin), the buyer typically pays the shipping cost and is responsible for the goods during transit. If the terms are FOB destination, the seller is responsible for the cost of shipping and the goods during transit, and thus would record the shipping cost as “freight out.
It’s important to note that if “freight out” costs are a substantial portion of a company’s operations (such as in the case of a delivery or logistics company), they might be classified as part of the cost of goods sold rather than an operating expense. The proper classification can vary based on industry practices and the materiality of the amounts involved.
Example of Freight Out
Imagine a company called “Tech Titan” that sells electronic gadgets. They sell a laptop to a customer for $1,000, and the terms are FOB Destination, which means Tech Titan is responsible for shipping the laptop to the customer. The shipping cost to deliver the laptop to the customer’s home is $50.
This $50 is considered a “freight out” cost. Tech Titan would record the sale of the laptop and the related cost in their accounting books as follows:
- Revenue from laptop sale: $1,000
- Cost of goods sold: (cost of the laptop itself)
- Freight Out Expense (Operating Expense): $50
The freight out cost of $50 is treated as an operating expense and is included in the income statement under selling expenses. It’s important to note that this freight out cost does not reduce the revenue earned from the sale of the laptop; instead, it is an additional expense incurred to facilitate the sale.
This example illustrates how “freight out” costs are handled in accounting, specifically when the seller is responsible for the delivery of goods to the customer.