Free Shipping

[sigmas55]

Hi,

We sell goods from a specific brand (call it Brand X), sometimes we offer free shipping only for that brand sales, in which we pay the amount of shipping to shipping company instead of the customer. How to input this amount we paid in sales invoice in a way that reduces profitability of that brand only? (so shipping fees become added to cost of goods instead of as expense to the whole business).

Note that we don’t enter shipping costs in sales invoices when shipping is paid by customers.

Final Note:

I did something but don’t know if its correct or if it will have future implications or not, I added a special account to income section and called it “Brand X Sales”, then set all products of Brand X to have Custom income account pointing to “Brand X Sales”, then in the invoice with free shipping, I added an empty line with discount (entered shipping amount in discount) and set the account in that line to be “Brand X Sales” income account, in this case, free shipping is not considered an expense to manager, and total sales amount of all items of Brand X is reduced, meaning Brand X profitability is reduced without affecting other brands in the business.

Is this valid? is there a better way to record this?

[Ealfardan]

Your reporting requirements are weird but who am I to judge . First, I would consult with the auditors and if they agree to not fry you for it in their report, then sure you can do it your way.

How I would do it though is just create a non-inventory item for item X shipping that would transfer shipping to cost of sales. I would then use that item in my purchase invoice and keep my invoices free of any unnecessary complexity. The choice is yours

[Tut]

@Ealfardan

I would then use that item in my purchase invoice

But @sigmas55 was asking about sales invoices. Or was that a typo?

[Tut]

@sigmas55

in which we pay the amount of shipping to shipping company instead of the customer.

Understand that a payment to a shipping company for shipping costs belongs nowhere on a sales invoice to a customer. The counterparties are different. You can charge a customer for shipping or not, at your choice, but you are never going to pay a customer for shipping.

@sigmas55

so shipping fees become added to cost of goods instead of as expense to the whole business).

Shipping fees are not part of the cost of goods sold. The cost of goods sold is the portion of Inventory on hand that is transferred to Inventory - cost upon invoicing. In other words, it is just a conversion of asset value into an expense. The shipping costs were never part of assets, so they cannot be part of cost of goods sold. They are an expense of selling, not part of the cost of your goods that you are removing from inventory. (This is unlike incoming shipping charges, which can be part of the cost of goods, because you needed to pay the incoming shipping to move the goods into your inventory.)

@sigmas55

Note that we don’t enter shipping costs in sales invoices when shipping is paid by customers.

It is not clear why you are including this information. If customers are contracting with shipping companies separately for shipping, you should not include shipping costs on your sales invoices. It sounds like you never charge a customer for shipping. The only question is whether the customer pays the shipping company separately or you pay the shipping company (for Brand X goods). Either way, the treatment on the sales invoice is the same—silence concerning shipping costs.

@sigmas55

I added a special account to income section

No, I don’t believe you did. Special accounts are a certain type of subsidiary ledger under a balance sheet control account in Manager. You cannot add them as income accounts. I think you mean you added an ordinary account for the purpose of recording income from Brand X sales. That is consistent with your description of defining Brand X inventory items as having custom income accounts. So far, that is all fine.

@sigmas55

then in the invoice with free shipping, I added an empty line with discount (entered shipping amount in discount) and set the account in that line to be “Brand X Sales” income account,

That was not correct. The fact is, all your shipping is free to the customer as far as your sales invoices are concerned. (You told us so.) What you have referred to as “free shipping” is not a discount either, because it does not reduce the amount being charged to the customer. If you post the shipping cost as a discount, your customer will owe you less for the inventory they purchase from you.

@sigmas55

in this case, free shipping is not considered an expense to manager,

Here, you are also incorrect. The shipping expense you pay for Brand X customers is a real expense. But it does not belong on the sales invoice, as already noted, because it is not charged to the customer. Instead, when you enter a payment or purchase invoice to record your buying of shipping services from the shipping company, post the cost to either Brand X sales or a separate expense account, Brand X shipping expenses. Either way, you will be creating a debit that offsets the credit from the sale of the Brand X inventory item. That is how you should be reducing Brand X profitability. The second method gives you better visibility, rather than hiding shipping costs behind reduced sales totals. (Auditors won’t like that.)

[Ealfardan]

Hi Tut. How are you today?

No, it wasn’t a typo because I wouldn’t touch the sales invoice for that since there’s already a third party purchase invoice for the shipping costs.

[Tut]

Oh, so were you suggesting adding outbound shipping costs to the value of Brand X inventory items in Inventory on hand via the shipping company purchase invoice? If so, that seems unorthodox and might not be allowed in some jurisdictions. Certainly the outbound shipping costs are a selling expense, but not cost of goods in my opinion.

[Ealfardan]

@Tut

that seems unorthodox

It is unorthodox, but it’s much better than netting off the whole thing from sales as you just explained.

One thing though, I said to use a non-inventory item straight to Cost of Sales as other direct expenses and I didn’t suggest adding that to inventory on hand because that would be much worse than netting off with sales.

@Tut

Certainly the outbound shipping costs are a selling expense, but not cost of goods in my opinion.

While I agree that these are discretionary selling costs but they can be directly attributed to a single sales transaction so, technically, they can still pass for direct expenses if you can justify it to the auditors. I don’t necessarily agree with that though but sometimes people just want what they want.

Personally, I would go with your method of keeping outbound shipping in S&D though.

[sigmas55]

@Tut’s solution is working for me when posting shipping cost to Brand X sales, but I prefer to add it to a separate expense account to be more organized and for better tracking of this cost, but how will this separate expense account be deducting from Brand X sales only? here is what I see when trying to add new expense account to PnL, I can’t find a way to set the expense account to deduct from Brand X sales:

What did I misunderstood?

[Tut]

@sigmas55

how will this separate expense account be deducting from Brand X sales only?

It will not. That will have to be a separate calculation outside Manager. The purpose of the separate expense account was to give visibility, not reduce Brand X sales.

[sigmas55]

I noticed the early payment discount option in sales invoices, what if I take advantage of this feature to post free delivery cost as a discount to the whole invoice!

[Tut]

That would not come anywhere close to accomplishing what you want. To understand why, read the Guide: Record early payment discounts on receipts for sales invoices | Manager.

You need to abandon all ideas about putting this free shipping on our sales invoices. It is wrong for all the reasons I already wrote about.

[Joel_Aldrine]

@sigmas55

early payment discount option in sales invoices,

In short… early payment discounts simply help in a situation where a customer pays earlier than the invoice’s due date(the time agreed for the customer to make full payment)and was entitled to a reduction on the initial amount to be paid if they paid within those specific dates set