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.
Accounting for Free Shipping
Answers
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.
2
Thanks, Wayne. So, the overall entries would look like this:
Shipping Discount
Shipping Income
Postage Expense
Cash
Would you agree?
Ship Disct and Income are part of revenue; Postage expense is OPEX (below Gross Profit) and cash, well we should know where that is :)
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
1
Thanks, Len.
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
1
Thank you for the guidance