Freight Paid vs. Freight-Out

kyle001,

It is fairly easy to differentiate between Freight In and Freight Out. For starters, these are two separate G/L accounts and should be reported in two separate sections of the P&L statement - "Freight In" is considered Cost of Goods Sold and "Freight Out" is considered a Selling, General, and Administrative Expense. I'll expand on this a little . . . . Freight In is a cost that is incurred during the purchase of raw materials (for a manufacturing firm or restaurant) or a purchase for a product that is intended for resale (like jeans for a clothing retailer). I'll use the manufacturing firm as an example . . . . once the manufacturing process is complete, the raw materials become finished goods. This is the point that makes all the difference! All costs incurred to make the product a part of finished goods is considered cost of goods sold. Any expenses incurred after the product is a reported as finished goods inventory is considered Selling, General, and Administrative expenses. Freight Out is a cost that is incurred to put the product in the customer's hand and is therefore considered a part of the selling process (just like advertising and marketing are cost incurred to put the product in the customer's hand). Although, some accountants will include Freight Out in Cost of Goods Sold, it is good practice to report Freight Out as part of Selling, General, and Administrative expenses in order to prevent raising an auditor's eyebrow. I hope this answer was helpful.

Brian