In accounting, freight in is what you pay to get purchased inventory or materials into your business, and freight out is what you pay to deliver finished goods to your customers. The two look similar on a shipping invoice, but they land in completely different places on your financial statements. Freight in becomes part of the cost of inventory and sits on your balance sheet until the goods are sold. Freight out is a selling expense that hits your income statement in the period the shipment goes out. That single distinction shapes your gross profit, your taxable income, and your answers when an auditor asks how you handled shipping costs.
What Freight In Includes
Freight in captures every cost you incur to move purchased goods from your supplier to your facility. The carrier fee is the visible piece, but the full total usually includes several other charges tied to the same trip:
- Base transportation rates from the trucking company, rail service, or ocean line
- Fuel surcharges tied to diesel or bunker prices
- Transit insurance premiums
- Import duties and taxes assessed at the border1U.S. Customs and Border Protection. Customs Duty Information
- Terminal handling fees for loading, unloading, or transferring goods at ports or rail yards
What ties all of these together is purpose. Each one is necessary to bring the product to your place of business so you can process it or resell it. That shared purpose is why they get treated the same way in your books.
What Freight Out Includes
Freight out is every cost you pay to deliver finished products to your customer. In a wholesale relationship, that might be a pallet moving to a retail distribution center. In e-commerce, it is a courier package heading to a consumer’s home.
- Standard carrier charges for delivery
- Expedited service surcharges for overnight or two-day shipping
- Specialized handling fees for fragile, hazardous, or oversized items
- Protective packaging used specifically for the outbound stage
Freight out only exists because a sale has already happened. The product is complete, the revenue is booked, and the shipping cost is what it takes to close the loop with the customer. That is why the accounting rules treat it as a cost of selling rather than a cost of inventory.
How to Record Freight In
Under U.S. Generally Accepted Accounting Principles, freight in is a product cost. You add it to the value of inventory on the balance sheet rather than deducting it right away. The underlying principle: inventory cost equals everything you spent to bring an item to its current condition and location. Transportation, duties, and handling all qualify.
A quick example. You spend $5,000 shipping a $100,000 order of goods. Your balance sheet records $105,000 in inventory. That $5,000 stays there until you sell the items. When a sale happens, the cost moves out of inventory and into Cost of Goods Sold on the income statement, matching the freight expense to the revenue it helped produce.
International Financial Reporting Standards follow the same logic. IAS 2 states that the cost of purchasing inventory includes the purchase price, import duties and other taxes, and transport, handling, and other costs directly tied to acquiring the goods.2IFRS Foundation. IAS 2 Inventories
When a Freight-In Cost Should Not Be Capitalized
Not every inbound shipping charge belongs in inventory. Abnormal freight costs, meaning costs caused by events outside your normal supply chain, should be expensed immediately as period costs. Rerouting a shipment because a warehouse flooded is abnormal. A duplicate charge caused by a carrier’s error is abnormal. Higher-than-expected costs for routine activity are not: an ocean freight rate spike during a supply crunch still gets capitalized, because the shipment itself is a normal part of getting goods to you.
How to Record Freight Out
Freight out is a period cost. You recognize it as a selling or distribution expense in the same period the shipment happens. Pay $200 to ship a pallet of electronics in March, and that $200 reduces March net income. It has no effect on the value of inventory still in your warehouse.
The classification fits the economics. Freight out does not add value to the product, because the product is already finished and sold. The cost only exists to move the item to the buyer, so it sits below the gross profit line as a selling expense.
Keeping freight out on its own line has a practical payoff. A sudden increase can point to a wider geographic customer base, heavier reliance on premium delivery, or the margin cost of a free-shipping promotion. Blending it into COGS hides those signals and blurs the line between what you spent to acquire products and what you spent to distribute them.
Drop-Shipping
In a drop-shipping arrangement, your supplier ships directly to your customer. You never handle the inventory, but the outbound freight the supplier bills to you is still your freight out expense. Record it as a selling expense in the period the shipment occurs, the same way you would for goods leaving your own warehouse.
Return Shipping
When a customer returns a product and you pay to get it back, that return freight is generally recorded as an operating expense rather than reversed into inventory value. The original sale created a freight out expense; the return creates a separate one. If return volume is material, tracking return freight on its own line makes trends easier to spot and rates easier to negotiate.
Who Pays for Shipping: FOB Terms
Whether a given shipping charge is your freight in or the seller’s freight out often comes down to the FOB term in the purchase agreement. FOB stands for “free on board,” and the Uniform Commercial Code recognizes two main versions that decide who pays and who carries the risk.3Cornell Law Institute. Uniform Commercial Code 2-319 – FOB and FAS Terms
FOB Shipping Point
Under FOB Shipping Point, sometimes called FOB Origin, the seller’s responsibility ends once the goods are handed to the carrier at the seller’s location. Ownership transfers to you at that moment. You pay the transportation costs, recording them as freight in, and you bear the risk in transit.3Cornell Law Institute. Uniform Commercial Code 2-319 – FOB and FAS Terms If a truck accident destroys the shipment halfway to your warehouse, you file the claim and absorb the loss.
FOB Destination
Under FOB Destination, the seller keeps ownership and liability until the shipment arrives at your location. The seller arranges and pays for transportation and records the cost as freight out. If the goods are destroyed before they reach you, the seller must replace them or reverse the sale.3Cornell Law Institute. Uniform Commercial Code 2-319 – FOB and FAS Terms
Risk of Loss in Transit
The UCC handles risk of loss separately from delivery terms. When a contract calls for shipment by carrier but does not require delivery to a specific destination, risk passes to the buyer as soon as the goods are properly delivered to the carrier. When the contract requires delivery at a particular destination, risk stays with the seller until the goods are tendered there and the buyer can take delivery.4Cornell Law Institute. Uniform Commercial Code 2-509 – Risk of Loss in the Absence of Breach Spelling out the FOB point in your purchase agreements avoids arguments later over who files the claim, who pays the deductible, and who absorbs the loss.
International Shipments and Incoterms
UCC FOB terms apply to domestic U.S. transactions. For cross-border shipments, buyers and sellers use Incoterms, a set of standardized trade terms published by the International Chamber of Commerce. Incoterms 2020 includes 11 rules that allocate cost and risk across the international leg of a shipment.
At the far ends of the range sit two rules worth knowing. Under EXW (Ex Works), the buyer pays for everything, and the seller’s only obligation is to make the goods available at its premises. Under DDP (Delivered Duty Paid), the seller pays for everything, including export clearance, international freight, import duties, and final delivery.5ICC Academy. Incoterms 2020 – EXW or DDP Other Incoterms like CIF and the Incoterms version of FOB split responsibilities at intermediate points. For accounting, the rule is simple: whichever party bears the cost under the agreed Incoterm records it as freight in or freight out, following the same capitalization or expense rules that apply domestically.
Federal Tax Treatment Under UNICAP
Financial reporting rules are not the only rules that govern freight. Section 263A of the Internal Revenue Code, known as the Uniform Capitalization or UNICAP rules, requires businesses that produce property or acquire it for resale to capitalize both direct costs and certain indirect costs into inventory.6Office of the Law Revision Counsel. 26 USC 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses Inbound freight counts as a direct material cost subject to these rules.7eCFR. 26 CFR 1.263A-1 – Uniform Capitalization of Costs
In practice, you cannot deduct freight in as a current-year expense on your tax return. The cost sits in inventory until the goods sell, at which point it flows into COGS. Missing this on audit can trigger adjustments and penalties.
Smaller businesses get a break. Companies with average annual gross receipts of $25 million or less, adjusted for inflation, are exempt from Section 263A.6Office of the Law Revision Counsel. 26 USC 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses If you fall below the threshold, you have more flexibility on the tax side, though your GAAP financial statements still capitalize freight in the way described above.
Demurrage and Detention Charges
Ocean container imports come with two charges that catch people off guard. Demurrage is a fee for leaving a container at the marine terminal beyond the free time allowed. Detention is a fee for holding onto the container itself after you take it away, keeping it too long before returning it to the shipping line. The Federal Maritime Commission treats both as charges related to the use of marine terminal space or shipping containers, separate from the freight itself.8Federal Register. Demurrage and Detention Billing Requirements
The accounting treatment follows the same logic as abnormal freight. Routine, expected charges built into your supply chain, like a predictable port clearance delay, can be capitalized into inventory alongside your other freight-in costs. Charges from an unusual disruption, such as a customs hold or a logistics error, are better expensed in the current period.
Sales Tax on Shipping You Bill Customers
When you charge customers for shipping, whether that charge is taxable depends on the state. Roughly half of states with a sales tax treat delivery charges as taxable when they are not stated separately on the invoice, or when the customer has no option to pick the goods up instead of paying for delivery. Others exempt shipping when it is broken out as a separate line. A few states have no state sales tax at all.
The taxability of the underlying product matters too. In many states, shipping is only taxable if the item being shipped is itself subject to sales tax. If you ship to customers in more than one state, verify each state’s rules before you decide how to invoice. Under-collect and you will owe the state later. Over-collect and you will hear from customers.
The Documents to Keep
Two documents anchor your freight records. The bill of lading is issued by the carrier when it picks up the shipment. It functions as a receipt for the goods, a contract of carriage, and a document of title that can transfer ownership while the goods are in transit.9eCFR. 49 CFR 375.505 – Must I Write Up a Bill of Lading
The freight invoice arrives after the transportation service is complete and shows the actual billed charges: base rates, fuel surcharges, accessorial fees, and any duties or taxes. This is the document your accounting team posts, either into inventory as freight in or into selling expenses as freight out. Matching every freight invoice to its bill of lading is how you verify the charges are right and how you give an auditor a clean trail from shipment to financial statement.