Rustler’s Quickbooks Tips

The IRS says that any cost involved in acquiring an item for resale, or in building an item for resale is COGS. That includes taxes, shipping, import duties, etc. (pub 538)The IRS also says that COGS for an item must be expensed during the year the item is sold. [Sold not purchased.] (Rev Rul 71-234)

Basically then there is two ways to approach including shipping (et al) in the COGS calculations.

You can carry the total cost of shipping (etc) as an entry to COGS at the time of purchase. Then at the end of the year you are supposed to determine if the entire number of items for each shipping expense has sold. If it has then no problem, otherwise you are supposed to do a journal entry to offset the shipping amount that is to be carried forward to the new year for the unsold items. So what you end up at year end is inventory being carried forward and shipping costs for inventory on hand being carried forward. IMO this would be hard to track.

Another way to do this is to allocate the shipping, etc to the cost of the item at purchase time. When I receive several items on a purchase order and there is freight involved, I ‘guesstimate’ the relative shipping portion of shipping for the line items. On receipt, I will tab over to the total column for each line item and allocate a portion of the freight. When I change the total for the line item QB will recalculate the price per item. This new cost per item is saved in QB and used to determine average cost. That average cost per item is used to post to COGS when the item is sold, and this complies with the IRS requirements to expense inbound freight, etc in the year the item was sold.

Out bound shipping, the shipping you pay to send the item to your customer, is an expense and not COGS.