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Freight and Shipping: COGS or Expense?

When you are calculating the cost of your products, how do you handle the freight? Is it included in your cost of goods sold calculation? Or do you pay it from an expense account designated for freight or shipping?Freight and Shipping: COGS or Expense?Luckily, the IRS rules are pretty clear in this area.

If you are shipping a product from your manufacturer to yourself, your prep center, or Amazon, this is considered “freight in” and can be included in your calculation for Inventory and COGS.

“Freight in” is defined in the IRS Tax Guide for Small Business as “Freight-in, express-in, and cartage-in on raw materials, supplies you use in production, and merchandise you purchase for sale are all part of cost of goods sold.”  

Whenever you pay for shipping out to your customer, this is not included in COGS but is a monthly expense. This expense of shipping to the customer is directly related to sale of the product, so we include it in the Cost of Sales section and include it in the gross profit calculation.

Typically there is an expense account in the Cost of Sales section of your Profit and Loss Statement for shipping and it is used in this situation. 

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InventoryLab makes it easy to track COGS and Expenses.  For more information about COGS, you can look online at the IRS Tax Guide for Small Business.

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