Imagine your business pays two shipping bills in the same week. One is for bringing inventory in from a supplier. The other is for shipping a customer’s order. The shipping charges may look similar, but they are recorded very differently.
The second shipping bill is freight out. In accounting, freight out is the cost of shipping goods from your business to your customers. It is recorded as an expense in the period when you incur it and is never included in inventory.
The first shipping bill is freight in, which works differently. It becomes part of your inventory cost.
Shipping is one of the most commonly misclassified expenses we see when cleaning up e-commerce books, so this guide covers freight in vs freight out, shows the journal entries for each, explains where they appear on the financial statements, and answers the confusing questions.
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What is freight out in accounting?
Freight out is the cost of delivering products to your customers after a sale.
This includes courier charges for Shopify orders, LTL freight for wholesale deliveries, postage, and other shipping costs incurred after the sale. You’ll also see it called delivery expense, transportation out, or carriage outwards. They all refer to the same thing.
Because it happens after the sale, freight out is treated as a period expense. You record it when the cost is incurred. It does not become part of inventory.
Here are the answers to two common questions:
Is freight out an expense? Yes. It is generally recorded as a selling expense.
Is freight out an asset? No. Shipping goods to a customer does not create a future benefit, so it is never recorded as an asset on the balance sheet.
If you charge customers separately for shipping, that amount is recorded as shipping income. The amount you pay the shipping carrier is still recorded as freight out expense. These should be recorded separately instead of combining them into one figure.
What is freight in?
Freight in is the cost of bringing inventory or materials into your business. It covers the shipping charges you pay to move goods from your supplier to your warehouse, retail location, or FBA prep center.
Freight in becomes part of your inventory cost because it is one of the costs of getting inventory ready for sale. It is added to inventory on the balance sheet, just like installation costs are added to the cost of equipment.
The freight cost stays with the inventory until the goods are sold. At that point, it becomes part of cost of goods sold (COGS).
The IRS follows the same approach for tax purposes. Publication 538 explains that the cost of purchased merchandise includes the invoice price minus discounts, plus transportation and other charges incurred in acquiring the goods. That includes freight in.
A simple way to remember the difference is this:
Goods coming in: Add the shipping cost to inventory.
Goods going out: Record the shipping cost as an expense.
Freight in vs freight out: the difference
| Freight in | Freight out | |
|---|---|---|
| Direction | Supplier to you | You to your customer |
| When it happens | When buying inventory | After a sale |
| Treatment | Added to inventory cost (capitalized) | Expensed as incurred |
| Where it lands | Balance sheet, then COGS when goods sell | Income statement immediately |
| Part of COGS? | Yes, when the inventory sells | Usually not |
| Who pays | The buyer | The seller |
Freight in follows the inventory, and freight out follows the sale.
Journal entries for freight in and freight out
Freight in
Your business buys $8,000 of inventory, and the freight company charges $400 to deliver it. The freight cost is added to the inventory:
| Account | Debit | Credit |
|---|---|---|
| Inventory | $8,400 | |
| Accounts payable | $8,400 |
Nothing affects your profit yet. The full $8,400 stays on the balance sheet as inventory. Once the goods are sold, that amount, including freight costs, moves to the cost of goods sold. That also answers a common question, “Is freight a debit or credit?” It is recorded as a debit to inventory.
Freight out
Now suppose you ship a customer’s order and the courier charges $150:
| Account | Debit | Credit |
|---|---|---|
| Freight out (delivery expense) | $150 | |
| Cash (or accounts payable) | $150 |
That’s the whole entry. Freight out is recorded as a debit to an expense account, reducing profit during the period when the shipping cost is incurred.
If you charge the customer $150 for shipping, record that amount as shipping income, not as a negative shipping expense. Your P&L then shows shipping income of $150 and freight out expense of $150.
Recording them separately tells you what your shipping program costs. Combining them into one account can hide losses, and many businesses don’t realize their shipping program is losing money because of it.
Where each one shows up on the income statement
For most businesses, freight in does not appear as a separate line on the income statement. Instead, it becomes part of cost of goods sold (COGS) because it is included in the cost of inventory. For tax purposes, it follows the same way. IRS Publication 334 includes freight in as part of the COGS calculation for small businesses, and Schedule C reports it within the cost of goods sold section.
Freight out is recorded below gross profit for most small businesses, as a selling or delivery expense within operating expenses. Since it increases as sales increase, lenders and buyers read it as part of the cost of delivering products to customers.
Where you record freight out matters more than many people realize. If you include it in COGS, your gross margin becomes smaller. If you record it under operating expenses, your gross margin stays the same, but your operating profit decreases instead. Your net income stays the same either way, but anyone reviewing your financial statements will see different profit margins.
Is freight out part of COGS?
Some say freight out belongs in COGS, while others say it should always be treated as a selling expense and calling it COGS is an error.
The truth is that US GAAP does not require one presentation. Freight out is a period cost, but companies can present it in different ways. Most small businesses record it as a selling expense, which is the right choice. Some product-based companies include it in cost of sales because shipping costs increase as more products are sold.
Under ASC 606, the revenue standard, shipping that takes place after the customer has taken control of the goods can be treated as a fulfillment activity, with the cost recorded as an expense. This reflects the current GAAP approach.
What should never happen is adding freight out to inventory or changing its presentation from one period to the next. Choose one method and apply it consistently so your financial statements remain comparable.
When we set up a chart of accounts for product businesses, we create a separate freight out account under selling expenses. This keeps gross margin clean and makes shipping costs much more visible.
Who pays the freight? FOB terms and “freight allowed”
The shipping terms in the sales agreement determine which business records the shipping cost.
- FOB shipping point: ownership transfers when the goods leave the seller. The buyer pays the shipping and records it as freight in.
- FOB destination: Ownership transfers when the goods are delivered. The seller pays the shipping cost and records freight out.
- Freight allowed: The buyer pays the shipping company first and then deducts that amount from the seller’s invoice. Even though the buyer makes the payment initially, the seller is still responsible for the shipping cost, so it is treated as the seller’s freight out.
For a small business that ultimately pays the shipping cost records it, and whether it’s freight in or freight out depends on which side of the transaction you’re on.
Shipping costs for e-commerce and product businesses
For Shopify, Amazon, wholesale, and other product businesses, shipping is one of the biggest expenses after inventory. It’s also one of the accounting areas we see coded incorrectly most often.
We notice with online sellers that the inbound freight is coded to “Shipping” as an expense, outbound labels are coded to COGS, customer shipping charges are combined with shipping costs, and no one can clearly see what fulfillment actually costs per order.
Those numbers affect pricing decisions, free-shipping offers, and the profitability of each sales channel. When shipping costs are recorded incorrectly, those decisions become much harder to make.
Our financial advisory services offer a simple setup that usually solves the problem:
- Record inbound freight as part of inventory until the goods are sold, then let it flow into COGS.
- Use a separate freight out expense account for outbound shipping.
- Record what customers pay for shipping in a separate shipping income account.
With this setup, your P&L can clearly answer important questions, such as what does shipping really cost, is the free-shipping offer profitable, and which sales channel eats more fulfillment cost?
US tax rules give qualifying small businesses simplified inventory options, so how strictly you must capitalize inbound freight for tax purposes can differ from your book treatment.
Freight vs cargo and other shipping terms
Freight refers to the transportation of goods and the cost of moving them. Cargo refers to the goods being shipped, especially by ship or plane. In accounting, it’s the freight charge that gets recorded.
These are the shipping charges billed by transportation companies. Depending on whether the goods are coming into or leaving your business, they’re recorded as freight in or freight out.
This is simply another name for freight in. You’ll see this term on e-commerce and 3PL invoices.
Getting freight right from the first entry
Freight out becomes an expense as soon as you ship the goods. Freight in is inventory cost until the goods sell.
It’s also important to record customer shipping charges as income, keep freight out in the same place on your income statement each month, and avoid mixing either one into the wrong accounts.
If your shipping costs are scattered across different accounts, it can be difficult to see what shipping is really costing your business. We can help through our trusted bookkeeping services to clean that up.
Reach out for a free consultation, and we’ll review your shipping accounts, place each cost in the right category, and build a chart of accounts that fits the way your business actually ships.
This is general information, not personalized tax advice. Talk to a licensed CPA or tax professional about your specific situation.
FAQs
Is freight out a liability?
No, freight out is an expense, not a liability. The only liability is the unpaid shipping bill, which stays in accounts payable until it is paid. Once the bill is paid, the freight out expense remains on the income statement.
Is freight out a fixed expense?
No, freight out is a variable expense because it changes with the amount of products you sell and ship. That's one reason some companies include it in cost of sales, while others record it separately to better understand their shipping costs.
Is shipping part of COGS?
It depends on the type of shipping. Inbound shipping (freight in) becomes part of inventory and later moves into COGS when the goods are sold. Outbound shipping (freight out) is usually recorded as a selling expense, although GAAP does allow companies to include it in cost of sales if they apply that approach consistently.
What is the difference between freight and cargo?
Cargo refers to the goods being transported by truck, ship, or plane. Freight refers to the commercial transportation of those goods and, in everyday business, the cost of moving them. In accounting, the freight charge is what gets recorded as freight in or freight out.
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He is the founder of Predawn Accounting and has more than six years of experience helping small businesses maintain organized financial records, improve reporting accuracy, and better understand their financial position.
He is a qualified Chartered Accountant from ICAP Pakistan, holds a BS in Accounting and Finance, is an ACCA Candidate, an FMVA Certified professional, has also earned a Financial Planning and Analysis certification from the Corporate Finance Institute (CFI) and is a Certified QuickBooks ProAdvisor with experience working across industries, including real estate, construction, e-commerce, SaaS, and marketing agencies.
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