Freight Out

Last Updated :

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Blog Author :

Kumar Rahul

Edited by :

Ashish Kumar Srivastav

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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Freight Out Meaning

Freight Out, also known as delivery expense, refers to the cost of shipping goods from a business to its customers. Recording it as a separate expense accurately reflects the actual cost of delivering goods to customers. By understanding and managing these costs, companies can ensure they are pricing their products appropriately and maintaining their bottom line.

Freight Out (1)

By recording this expense separately, businesses can better track their shipping costs and determine the true profitability of their products. This information can help companies to make informed decisions about pricing and shipping policies and can also help them identify areas where they can reduce costs and improve efficiency.

Table Of Contents
  • Freight Out refers to the cost of shipping goods from a business to a customer. It is a separate expense in a business's financial records and is not in the inventory value.
  • The purpose of recording it is to accurately reflect the cost of delivering goods to customers. The customer typically pays it as part of the sales agreement.
  • Proper recording and management of it are essential for accurate financial reporting and determining the profitability of individual transactions.
  • Changes in the cost of shipping, such as those caused by disruptions in the shipping industry, can impact a business's profitability and pricing strategies.

Freight Out Explained

Freight out, or the cost of shipping goods to customers, is a significant expense that can significantly impact a business's profitability. It is an expense of the seller and is on the customer as part of the overall cost of the goods.

Freight-out expenses include various costs, such as packaging materials, handling fees, insurance, and transportation charges. The specific costs will depend on the shipping method, the destination of the shipment, and the size and weight of the goods in transit.

Some reasons why it's essential to pay attention to this expense:

  1. Accurate cost accounting: Recording it as a separate expense allows businesses to accurately track the actual cost of delivering goods to customers. This helps companies to determine the profitability of individual products and identify areas where they can reduce costs.
  2. Pricing decisions: Understanding the actual cost of shipping goods can help businesses make informed decisions about pricing their products. If shipping costs are high, companies may increase prices to ensure profitability.
  3. Customer satisfaction: Charging customers for it as a separate line item helps businesses avoid disputes over shipping charges and ensures that there is appropriate compensation for the cost of shipping. This can improve customer satisfaction and help companies build strong customer relationships.
  4. Shipping efficiency: Businesses can identify areas to reduce costs and improve shipping efficiency by tracking shipping costs. This can help companies to save money and improve customer satisfaction by delivering products more quickly and reliably.

How To Record?

Freight Out is typically recorded as an expense in a business's accounting records. Here are the general steps for recording it:

  1. Determine the cost of shipping: The first step is to determine the total cost of shipping the goods to the customer. This includes transportation charges, packaging costs, and other costs associated with shipping and delivering the goods.
  2. Record the expense: Once you have determined the total shipping cost, record it as an expense in your accounting records. Depending on your accounting method, you may register the payment in various accounts, such as "Freight Out" or "Delivery Expense.”
  3. Allocate the expense: If the shipping cost relates to a specific customer order or sale, allocate the expense to that customer order or sale. This ensures that the payment is accurate in your financial records and enables you to determine the profitability of individual transactions.
  4. Charge the customer: If you plan to charge the customer for the shipping cost, create a separate line item on the invoice or sales receipt for freight out. This allows you to pass the shipping cost to the customer and avoid absorbing the price yourself.
  5. Reconcile the account: Regularly reconcile it to ensure it is accurate and up-to-date. This will help you identify any errors or discrepancies in your accounting records and ensure that your financial statements are correct.

Examples

Let us understand it in the following ways.

Example #1

Amacon Co. is a manufacturer of widgets that sells its products online. The company ships its products to customers nationwide using various shipping carriers. In one month, Amacon sends 500 devices to customers at a total cost of $10,000. The company records this cost as Freight Out and allocates it to individual customer orders. Amacon charges customers a flat rate of $20 for shipping, which covers the cost of freight out and provides a small profit margin.

Example #2

In 2021, the global shipping industry was hit by a wave of disruptions that caused a significant increase in the cost of shipping. This increase in shipping costs impacted many businesses, including retailers, who rely on shipping to deliver their products to customers. One example was the backlog of shipping containers built up in ports worldwide, leading to delays and higher costs for businesses that rely on shipping. As a result, many companies raise their prices or absorb the higher shipping costs themselves, which impacts their profitability.

Freight In vs Freight Out

Freight In and Freight Out are popular in accounting to describe the cost of shipping goods. However, there are some critical differences:

  1. Definition: Freight In refers to the cost of shipping goods from a supplier to a business, while the latter refers to importing goods from a company to a customer.
  2. Ownership: The ownership of goods differs. In Freight In, the business owns the interests, but the customer acknowledges the goods in the latter.
  3. Financial treatment: Freight In is typically an addition to the cost of the goods and is present in the inventory value. In contrast, freight out is a separate expense and is not present in the inventory value.
  4. Timing of payment: The timing of payment for freight in and freight out is different. The business typically pays Freight To the supplier as part of the purchase agreement. The customer generally pays freight out as part of the sales agreement.
  5. Purpose: The purpose of recording both is different. The purpose of recording freight in is to accurately reflect the cost of acquiring inventory, while the purpose of documenting the latter is to accurately reflect the cost of delivering goods to customers.

Frequently Asked Questions (FAQs)

Is freight out an expense?

It is typically recorded as an expense in a business's accounting records. It is treated as an expense in the income statement of a company.

Freight out is what type of account?

It is an expense account in a business's accounting system. Specifically, it is a sub-account under the general expense account category.

Is freight out included in the cost of goods sold?

It is not typically included in a business's cost of goods sold (COGS). Direct prices typically include materials, labor, and manufacturing overhead.

Is freight out an operating expense?

It is considered an operating expense in a business's accounting system. Therefore, operating expenses, including Freight Out, are recorded in a company's income statement and are deducted from the revenues to arrive at the operating income or profit of the business.