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Capitalize Freight Paid by Consignor

In a consignment relationship, freight paid by the consignor to ship inventory to a consignee is capitalized by the consignor. However, why is that the case? Isn’t freight out expensed by the seller?

The general rule is to remember that freight in = capitalize and freight out = selling expense, but in a consignment relationship, the timeline for recognizing revenue could be different.

Think about the matching principle. Freight out is normally expensed because the revenue is recognized. However, in a consignment transaction, the consignment inventory could sit 6 months before it is sold. If the consignee expensed the freight when it was shipped and then recognized the revenue 6 months later, the matching principle is violated. 

Therefore, freight paid by the consignor is always capitalized by the consignor.


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