Do you capitalize shipping costs?

Should You Capitalize Shipping Costs? A Deep Dive into the World of Capital Assets

The question of whether to capitalize shipping costs might seem mundane, but it’s a crucial point that impacts your financial statements and, ultimately, your company’s profitability picture. The short answer is: it depends. However, when dealing with capital assets, the answer is often a resounding yes.

Let’s break down why and when you should be capitalizing those freight and shipping expenses.

What Does “Capitalizing” Mean?

Capitalizing an expense means recording it as an asset on your balance sheet, rather than immediately expensing it on your income statement. This means the cost is recognized over the asset’s useful life through depreciation, amortization, or depletion. Think of it as spreading the cost over the period the asset benefits the company.

The Capital Asset Connection: Why Shipping Costs Matter

Capital assets are significant, long-term investments your business makes, like machinery, equipment, buildings, and vehicles. These assets are expected to generate revenue for more than one accounting period. When you purchase a capital asset, the purchase price isn’t the only expense to consider. The costs associated with getting the asset ready for its intended use are also part of its overall value.

This is where freight and shipping come in. If you incur freight and shipping expenses to get a capital asset to your location and ready for use, those costs are considered a necessary part of the asset’s acquisition and should be capitalized.

Think of it this way:

• The asset is purchased for $10,000.
• Shipping costs are $500.
• Installation costs are $200.

The total capitalized cost of the asset is $10,700 ($10,000 + $500 + $200). This entire amount is then depreciated over the asset’s useful life.

Why Capitalize Shipping Costs for Capital Assets?

There are several compelling reasons to capitalize these expenses:

• Accurate Asset Valuation: Capitalizing shipping costs provides a more accurate representation of the asset’s true cost. It reflects all the expenses necessary to get the asset operational.
• Matching Principle: The matching principle of accounting dictates that expenses should be recognized in the same period as the revenue they help generate. Capitalizing the cost and depreciating it over the asset’s useful life adheres to this principle. The shipping cost contributes to the asset’s revenue-generating capacity over its entire lifespan, not just in the year it was purchased.
• Improved Financial Reporting: Capitalizing these costs provides a more complete and accurate picture of your company’s financial health. It avoids understating assets and overstating expenses in the initial period.
• Tax Implications: Depending on your tax jurisdiction, capitalizing and depreciating assets can have favorable tax implications.

When Not to Capitalize Shipping Costs:

It’s important to note that this guidance applies specifically to capital assets. Shipping costs associated with inventory or goods sold as part of your regular business operations are typically expensed in the period they are incurred. This is because those shipping costs are directly related to generating revenue in that specific period.

In Conclusion:

When acquiring capital equipment, don’t overlook the seemingly small details like shipping costs. Properly capitalizing freight and shipping expenses, along with other costs directly attributable to preparing the asset for its intended use, is crucial for accurate financial reporting, adherence to accounting principles, and a clear picture of your company’s financial standing. Consulting with a qualified accountant or financial advisor is always recommended to ensure compliance with accounting standards and tax regulations in your specific jurisdiction. Understanding this nuance can significantly impact your financial statements and long-term business strategy.