Dictionary / Drop Shipment
What does Drop Shipment mean in accounting?
Quick definition
GeneralA shipment from a manufacturer or supplier sent directly to the customer of a distributor or other supplier without passing through the hands of the latter. This term guides how bookkeepers record, classify, and explain related transactions in routine financial reporting.
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Examples
The factory ships straight to your customer
You run a home furnishings shop. On June 18, an upholstery factory ships a sectional from its factory straight to your customer's house; you never see the sofa. You invoice the customer $3,680 that day and book accounts receivable and sales. The factory's $2,210 bill hits accounts payable and cost of sales. Do not receive the sectional into inventory.
A restock you receive then reship is not this
You run a lighting distributor. On September 8 you receive 12 pendants from a lighting manufacturer at your warehouse and enter a $1,440 bill into inventory. On September 19 you reship three of them to a cafe and invoice the cafe $540. That is a normal purchase, then a sale: inventory went up, then cost of sales came out of stock you actually held. If the manufacturer had shipped those three pendants straight to the cafe, that would be a drop shipment.
Why it matters
A drop shipment is a manufacturer or supplier sending goods straight to your customer so the goods never pass through your hands. You will not post this most months unless you regularly sell items you do not stock; it shows up when a factory ships to your customer's address and bills you, while you invoice the customer. Treat it like a restock you received and then reshipped and you add inventory you never had, then cost of sales no longer matches the sale. Invoice the customer, enter the factory bill to cost of sales, and leave inventory alone.
Further reading
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What is Drop Shipment in bookkeeping?
A shipment from a manufacturer or supplier sent directly to the customer of a distributor or other supplier without passing through the hands of the latter.
When should I use Drop Shipment?
Use Drop Shipment when the transaction facts match its definition and you need the ledger and financial statements to reflect the correct account and period.
What is a common mistake with Drop Shipment?
Drop Shipment is used for drop shipment entries, while Daybook covers a related but distinct bookkeeping purpose. Review both terms before posting unusual transactions. A common mistake is applying it by label only instead of checking the underlying transaction details.