How Shipping, Freight, and Handling Costs Are Classified in the Income Statement

Shipping, freight, and handling costs represent expenses associated with delivering goods to customers or receiving goods from suppliers. Their classification in the income statement depends on whether they relate to inbound logistics (part of inventory cost) or outbound logistics (part of operating expenses). Clear presentation of these costs helps users evaluate gross margin accuracy and overall operational efficiency.

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What shipping and freight costs represent

Shipping and freight costs include all expenses incurred to move goods through the supply chain. These costs may arise from:

• Inbound freight: Costs to transport raw materials or goods from suppliers to the company’s facilities.

• Outbound freight: Costs to deliver finished goods to customers.

• Handling and packaging: Labor and materials used for preparing goods for shipment.

• Third-party logistics (3PL): Costs paid to external carriers and warehousing partners.

The distinction between inbound and outbound freight determines whether these costs are capitalized as part of inventory or expensed immediately.

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Classification in the income statement

The classification of shipping and handling costs depends on the point at which ownership transfers and the company’s policy under applicable standards:

• Inbound freight is typically included in inventory cost under IAS 2 (Inventories) and ASC 330 (Inventory). When the goods are sold, these costs flow into cost of goods sold (COGS).

• Outbound freight is usually recognized as an operating expense, most commonly under selling expenses or distribution expenses.

Example:

Item	Amount (USD)
Net Sales	1,500,000
Cost of Goods Sold	(900,000)
Gross Profit	600,000
Selling and Distribution Expenses (incl. Freight Out)	(70,000)
Administrative Expenses	(180,000)
Operating Income	350,000

This structure ensures accurate reflection of how logistics affect both production costs and sales operations.

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Journal entries for shipping and handling costs

Inbound freight (capitalized):

• Debit: Inventory 10,000

• Credit: Cash/Accounts Payable 10,000

Outbound freight (expensed):

• Debit: Freight Out Expense 5,000

• Credit: Cash/Accounts Payable 5,000

Handling and packaging (expensed):

• Debit: Selling Expense – Handling 2,000

• Credit: Cash/Accounts Payable 2,000

These entries demonstrate how the same cost type may either increase inventory value or reduce current period profit depending on its function.

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Standards under IFRS and US GAAP

• IFRS (IAS 2 – Inventories): Inbound freight and handling costs directly attributable to bringing inventory to its current location and condition are included in inventory cost. Outbound shipping is recognized as an expense when incurred.

• US GAAP (ASC 330 and ASC 606): Similar treatment applies, though ASC 606 also allows capitalization of incremental contract costs (such as freight-in for contract fulfillment) when specific criteria are met.

Both frameworks require consistency in classification and disclosure to enhance comparability.

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Impact on profitability and ratios

Classification decisions directly affect gross profit and operating margin. If outbound freight is included in COGS instead of operating expenses, gross margin appears lower but total operating income remains unchanged. Analysts often adjust reported figures to ensure consistency when comparing across companies.

For example, if gross profit margin appears to decline year over year, but the company recently reclassified shipping costs from operating expenses to COGS, the apparent decline may be purely presentational.

Proper classification is therefore essential for accurate trend and peer analysis.

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Disclosures required for shipping and handling costs

Companies must disclose:

• Accounting policies for freight and handling classification.

• The total amount of freight included in COGS or operating expenses.

• Any reimbursements received from customers for shipping.

Such transparency ensures that stakeholders can understand how logistics costs affect profitability.

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Operational considerations

Shipping, freight, and handling costs provide critical insight into supply chain efficiency. Monitoring these costs helps identify opportunities to optimize routes, consolidate shipments, or negotiate better carrier contracts. In manufacturing and retail, effective management of freight-in and freight-out costs directly improves margin control. From a reporting standpoint, consistent classification allows for clearer year-over-year comparisons and better alignment with accounting standards.

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