Shipping (and freight) can represent a cost or revenue depending on the business transaction. Companies have to report shipping and freight on their general ledger. Different general ledger accounts are available to report this information accurately and timely. Generally accepted accounting principles, or GAAP, provide specific instructions for reporting shipping and freight as revenue.
Companies must report shipping and freight as revenue when they bill a customer for these charges. For example, a manufacturer produces and ships equipment to customers. Shipping charges billed to customers can represent revenue. The manufacturer pays a discounted shipping rate while billing the full retail shipping rate to customers. The difference between the two numbers represents revenue for the manufacturer and needs to be included on the company’s income statement.
When a company ships goods to customers but does not charge for it, it can represent a cost of doing business. Businesses will need to report shipping charges as an expense. An expense account resides on the lower half of the income statement. Companies that offer free shipping look to induce sales through this offer. Reporting for these charges, however, result in lower net income because the company does not earn any shipping revenue from the sale.
Addition to Inventory
Businesses that pay shipping can usually include these charges as part of inventory costs. This avoids the need to expense shipping charges for purchasing inventory items. Companies will record the expenses as an asset along with the cost paid for inventory. The shipping charges will eventually fall under the company’s cost of goods sold when they sell inventory items. This is a cost that ultimately reduces a company’s gross profit and net income.
GAAP provides directions for accountants needing to record shipping charges. Proper reporting depends on accounting reviewing the shipping charges for each transaction and applying GAAP to the specific situation. This ensures the company properly reports shipping charges and does not overstate revenue or understate cost of goods sold or expenses.