gaap insuranc expense accounting operating or cogs

Understanding GAAP Guidelines for Recording Freight Out Expense in COGS vs. Operating Expenses

The cost of delivering goods to customers can be a significant expense for businesses, especially when dealing with long-distance deliveries or bulky products. In accordance with Generally Accepted Accounting Principles (GAAP), freight out expenses should be recorded and classified correctly on the income statement. In this article, we'll explore the differences between recording freight out as a cost of goods sold (COGS) versus an operating expense.

Freight Out Expense in COGS

The cost of goods sold (COGS) line item represents the direct cost of selling products or services to customers. This includes not only the purchase price of direct materials and labor but also other costs necessary to bring inventory into its present condition and location. Freight out expenses are a common example of an additional cost that should be included in COGS. This is because the supplier incurs this cost when delivering goods to customers, which directly affects their profitability.

Recording Freight Out as an Operating Expense

On the other hand, freight out expenses can also be recorded as an operating expense (OpEx) if they are incurred during day-to-day company operations rather than specifically for delivering goods to customers. According to IAS 2, inventory costing guidance provides that 'the cost of an item of inventory shall be determined using one of the following methods: first-in, first-out (FIFO); last-in, first-out (LIFO); or weighted average cost.' However, this only applies if the supplier is not generating revenue from freight billings.

When determining how to record freight out expenses, there are several key considerations to keep in mind:

* If freight out expenses are directly related to delivering goods to customers, they should be recorded as a cost of goods sold (COGS) expense.

* If freight out expenses are incurred during day-to-day company operations rather than specifically for delivering goods to customers, they can be recorded as an operating expense (OpEx).

* In cases where freight revenue is being separately recorded, then so too should the associated freight expense.

By understanding these guidelines and recording freight out expenses correctly, businesses can accurately determine their profitability and make informed decisions about their operations.

Gaap insuranc expense accounting operating or cogs