Freight in accounting is the cost of moving goods, and it lands in one of two places depending on direction: shipping paid to bring purchased inventory into your business gets added to that inventory’s cost on the balance sheet, while shipping paid to send finished goods out to customers is expensed on the income statement in the period you incur it. The labels for these two flows are Freight-In and Freight-Out, and treating them interchangeably distorts both inventory values and gross margin.
The In vs. Out Split
One question decides the treatment: are the goods coming in or going out?
Freight-In is the cost of getting purchased inventory or raw materials to your facility. It includes carrier charges, insurance during transit, and handling fees tied to receiving the shipment. Because it’s part of acquiring inventory, it gets capitalized into the asset.
Freight-Out is the cost of shipping finished goods from your location to a customer. It’s a selling cost, not an acquisition cost, so it hits the income statement immediately.
The two never swap treatment. Confusing them throws off gross profit, because Freight-In sits above the gross profit line inside inventory cost and Freight-Out sits below it in operating expenses.
Recording Freight-In
Freight-In gets capitalized into inventory. Under ASC 330, inventory cost includes every expenditure directly or indirectly incurred to bring an item to its existing condition and location, and freight is one of the most common of those expenditures.
The journal entry is simple. When you pay $1,000 in shipping to receive inventory, you debit Merchandise Inventory for $1,000 and credit Cash or Accounts Payable for $1,000. The freight charge never touches an expense account at this stage. It sits in inventory alongside the purchase price of the goods.
Here’s what that looks like in practice. Buy 1,000 units at $10 each and pay $500 in Freight-In. Total inventory cost is $10,500, which puts each unit on your books at $10.50. That per-unit cost follows the inventory regardless of whether you use FIFO, LIFO, or weighted-average, because freight has to be baked into unit cost before any cost-flow assumption is applied.
Freight-In only reaches the income statement when the related inventory is sold. At that point, the capitalized cost moves from Inventory on the balance sheet into Cost of Goods Sold. Sell 600 of those 1,000 units and only $6,300 of the $10,500 flows to COGS. The remaining $4,200 stays on the balance sheet until those units are sold. This deferral is the matching principle: revenue from a sale gets matched against all costs incurred to acquire the item sold.
Recording Freight-Out
Freight-Out works differently because it has nothing to do with building inventory value. By the time you’re shipping to a customer, the product is already made or purchased and sitting on your shelf. The transportation cost is part of completing a sale, not part of acquiring the goods.
The journal entry debits an expense account, typically Delivery Expense or Shipping Expense, and credits Cash or Accounts Payable. The charge flows immediately to the income statement under Selling, General, and Administrative expenses. It reduces operating income in the period you incur it, regardless of when the customer actually receives the goods.
Freight-Out has no effect on inventory valuation or Cost of Goods Sold. That separation keeps gross profit clean. If you lumped Freight-Out into COGS, you would understate gross margin and overstate operating expenses, making the business look worse at sourcing and better at selling than it actually is.
Shipping Terms Decide Who Pays
Whether a specific freight charge is Freight-In or Freight-Out often comes down to the shipping terms in the contract. In domestic U.S. transactions, these are typically written as “FOB” terms, short for Free On Board.
FOB Shipping Point
Under FOB Shipping Point (also called FOB Origin), the seller’s obligation ends the moment the goods leave the seller’s dock. The buyer takes ownership during transit and bears the risk of anything happening along the way. The Uniform Commercial Code provides that when the FOB term names the place of shipment, the seller must ship the goods and bear the cost of getting them to the carrier, but nothing beyond that point.1Legal Information Institute. Uniform Commercial Code 2-319 – FOB and FAS Terms
For accounting purposes, the buyer records the transportation cost as Freight-In. It doesn’t matter who physically pays the carrier. If the contract says FOB Shipping Point, the freight cost belongs to the buyer and gets capitalized into inventory.
FOB Destination
FOB Destination flips the arrangement. The seller retains ownership and risk until the goods arrive at the buyer’s location. Under the UCC, when the FOB term names the place of destination, the seller must transport the goods to that place at the seller’s own expense and risk.1Legal Information Institute. Uniform Commercial Code 2-319 – FOB and FAS Terms
The seller records this cost as Freight-Out in SG&A. The buyer records nothing for shipping because delivery is the seller’s problem.
A Note on International Shipments
FOB under the UCC is not the same as FOB under Incoterms, the rules used in international trade. UCC FOB can reference any location. Incoterms FOB strictly refers to the point where goods are loaded onto a vessel at a named port. International contracts also use terms like CIF (Cost, Insurance, and Freight) and DDP (Delivered Duty Paid), each of which allocates cost and risk differently. If you’re doing cross-border work, the contract needs to specify which framework governs.
Allocating One Freight Bill Across Multiple Products
A single shipment rarely contains just one product. When a freight bill covers several items, the cost has to be spread across them. There’s no single mandated method, but the allocation has to be reasonable and applied consistently.
The three common approaches are allocation by purchase value, by weight, or by unit count. Allocation by value is the simplest: if one product represents 60% of the invoice total, it absorbs 60% of the freight charge. Weight-based allocation makes more sense when the shipper is charging based on weight rather than value. A pallet of inexpensive steel bolts costs more to ship than a small box of expensive electronics, and weight-based allocation reflects that.
Some businesses skip per-shipment allocation and use a standard burden rate. If freight typically runs about 8% of your total inventory purchases over a quarter, you can mark each item’s cost up by 8% at receipt. The rate needs periodic review, but it saves considerable time compared to allocating every shipment line by line.
How the IRS Treats Freight
The IRS treats Freight-In the same way GAAP does. IRS Publication 334 states that freight-in, express-in, and cartage-in on raw materials, production supplies, and merchandise purchased for resale are all part of Cost of Goods Sold.2Internal Revenue Service. Publication 334 – Tax Guide for Small Business You can’t deduct these shipping costs as a standalone business expense in the year you pay them. They get capitalized into inventory and deducted only when the inventory is sold.
UNICAP for Larger Businesses
Larger businesses face an additional requirement under Section 263A of the Internal Revenue Code, known as the Uniform Capitalization rules. UNICAP requires businesses that produce property or acquire it for resale to capitalize both the direct costs of that property and a proper share of indirect costs allocable to it.3Office of the Law Revision Counsel. 26 USC 263A – Capitalization and Inclusion in Inventory Costs Freight is one of the most straightforward direct costs that must be included.
The Small Business Exception
If your business has average annual gross receipts of $31 million or less over the prior three tax years (indexed annually for inflation), you qualify as a small business taxpayer and are exempt from UNICAP.2Internal Revenue Service. Publication 334 – Tax Guide for Small Business That exemption also opens the door to simplified inventory accounting under Section 471(c).
Qualifying small businesses can elect to treat inventory as non-incidental materials and supplies.4Office of the Law Revision Counsel. 26 US Code 471 – General Rule for Inventories Under this method, you deduct the cost of the inventory, including any associated freight, in the year you provide that inventory to a customer rather than tracking capitalized costs through a formal inventory system.5eCFR. 26 CFR 1.471-1 – Need for Inventories The end result is similar to capitalization, since you still can’t deduct until the goods are sold, but the recordkeeping burden drops significantly. For a small retailer or manufacturer, this can remove the need to unitize freight charges and track per-item costs through the system.
Import Costs Beyond the Carrier’s Bill
When goods cross international borders, the costs that get capitalized into inventory extend beyond what the carrier invoices. Under ASC 330, inventory cost includes every charge necessary to bring goods to their existing condition and location. For imported inventory, that means customs duties, tariffs, brokerage fees, and import taxes all get added to the inventory’s cost basis alongside the freight itself.
This is where the accounting gets missed most often. A company that properly capitalizes ocean freight but expenses customs duties in the period paid is misstating inventory just as badly as one that expenses domestic freight. Every cost necessary to get the goods from the foreign supplier to your warehouse belongs in inventory, and it stays there until those goods are sold.
Documentation to Keep
Clean freight accounting depends on matching two documents: the bill of lading and the freight bill. The bill of lading is the legal receipt for the shipment, recording what was shipped, in what condition, and under what contract terms. The freight bill is the carrier’s invoice for the service. When the two agree on quantities, weights, and terms, your records have a clean audit trail. When they don’t, investigate before you pay.
Reconciling inbound freight bills against bills of lading is standard practice in a receiving department. Discrepancies, like accessorial charges for detention or liftgate service that don’t appear on the bill of lading, are common triggers for freight audits and payment disputes. Keeping these documents organized and matched pays off for internal cost control and for any tax audit where the IRS wants to see how you calculated your inventory cost basis.