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Accounting for Free Shipping

We offer free shipping to customer for purchase over $50. In accounting for this, I'm currently using a Sales Discount (contra-revenue) account for my debit and Shipping Revenue (revenue) account for my credit. These both aggregate to zero for the net sales figure. However, I don't like the fact that this grosses up my revenues. How would you suggest making this entry? I'm contemplating crediting our Postage expense, which would serve as a reclassification out of cost of sales, as we purchase postage ahead of time in bulk--but, I'm not sure if this is within GAAP guideance, nor what I'm currently doing, for that matter.

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

We had a long heated discussion on shipping out a while back. I think GAAP in most instances overstates revenue; but alas I (nor anyone I've ever met has any input into what GAAP is and isn't) but I digress.

My understanding is that you should charge the shipping fee and reverse it or just handle the situation as is. You might want to use a Freight Discount account if you really want to see how much shipping you ate on this offer, but that is immaterial to the general discussion.

Show Shipping revenue in Sales (overstate your revenues), show shipping expense in OPEX, NOT CGS and you've met from my understanding GAAP.

BJ Zeyer
Title: Accountant
Company: Nickel & Suede
(Accountant, Nickel & Suede) |

Thanks, Wayne. So, the overall entries would look like this:

Shipping Discount
Shipping Income

Postage Expense
Cash

Would you agree?

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Ship Disct and Income are part of revenue; Postage expense is OPEX (below Gross Profit) and cash, well we should know where that is :)

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

BJ
If you are talking about management reporting on operations, maybe forget GAAP. If sales people think that free shipping is not something they can control, then they are less likely to worry about it.

Can you carve out of a $50+ order what your cost of free (i.e. unbilled) shipping is, so you can derive product net revenue? Then set up your chart of accounts so you can measure product profitability excluding shipping across all orders. If your management analysis is that you are doing a lot more $50+ orders you may want to evaluate the impact of the free shipping deal to avoid margin erosion, or test the market by trying a $75 threshold if you see that is a better level.
Sales order analytics can be a great help here.

You can always combine/add back for GAAP reporting.
Len

BJ Zeyer
Title: Accountant
Company: Nickel & Suede
(Accountant, Nickel & Suede) |

Thanks, Len.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

This should be a good starting point. Your specific issue is on Page 9. (Note: I can't find the date of this issue.)

https://www2.bc.edu/peter-dicarlo/KPMG%20acctg%20issues.pdf

BJ Zeyer
Title: Accountant
Company: Nickel & Suede
(Accountant, Nickel & Suede) |

Thank you for the guidance

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