What is Meant by Carriage Inwards and Carriage Outwards?
Carriage refers to the cost of transporting goods into a business from a supplier and the cost of transporting goods from a business to its customers. The amount of transportation expense settled by the purchaser of the goods is called Carriage Inwards. The cost incurred by the seller of goods to deliver the goods sold to customers is called Carriage Outwards. The amount of Carriage Outward is posted in the Profit and Loss Account as an indirect expense and the amount of Carriage Inward in Trading Account as a direct expense. Since both the amounts are registered as expenses, they are recorded as debit balances.
What is Carriage Inwards?
If you are looking to understand “what is carriage inwards?”, then it is quite simple. It is the handling and shipping charges or the transport cost which a company or an individual incurs when there is a purchase of the goods or raw materials. It refers to the expense that is incurred to bring the purchased goods into the premises of the business or to the required location. Carriage inward is a nominal account, and it is also known as transportation-in or freight-in. It is evaluated as a direct expense and Carriage inward in trading account reflects on the debit side of it. This is the fundamental answer to “what is carriage inwards?”
What is Carriage Outwards?
Now we know about carriage inwards, the next question comes is, what is carriage outwards? The exact opposite of carriage inwards is termed carriage outwards that is it refers to the handling and shipping costs that a company incurs while transporting the goods to a client. In the income statement, the cost of carriage outwards usually occurs within the cost of goods sold. Carriage outward is an example of overhead, and it is treated as an indirect expense. Carriage outwards can also be called freight-out or transportation-out.
What is the Accounting Impact and Profitability Impact of Both Carriage Inwards and Carriage Outwards?
The carriage inward in trading accounts is accounted for in the books of accounts of the buyer, while the carriage outwards is accounted for in the books of the accounts of the seller. The carriage inward in the trading account is debited, while the carriage outwards is debited to the profit and loss account.
The gross profitability of the buyer is impacted by the occurrence of carriage inwards, while the net profitability of the seller is impacted by the occurrence of carriage outwards.
With the above-mentioned definitions, we can now understand the difference between carriage inwards and carriage outwards.
Solved Examples
Q1. Mention the major difference between carriage inwards and carriage outwards.
There are numerous differences between carriage inwards and carriage outwards. Both of the terms are opposite of each other, and their functions differ at several levels such as:
The carriage inward refers to the transport or freight cost which the buyer incurs on the purchase of goods or raw materials, while the carriage outward refers to the cost of transport or freight which the seller incurs while delivering or shipping the goods sold by it.
When we talk about what is carriage outwards?, it is the carriage outward is incurred on the inventory of the seller while the carriage inward is acquired on purchase of capital goods, raw materials etc.
The seller incurs the carriage outwards at the time of sale or delivery of goods, while a buyer incurs the carriage inwards during the time of purchase.
Carriage inwards is a direct expense while the carriage outwards is vice-versa. That is, it is an indirect expense.
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The difference between carriage inwards and carriage outwards is demonstrated in the above image. One can easily spot that both are opposite of each other and goes vice-versa. The carriage inwards is the inventory or the cost of sales, while the carriage onwards is the selling cost. Both the terms have several differences. The carriage inwards can be taken as the transportation cost which occurs while transferring the goods from the location of the supplier to the location of the buyer, whereas the carriage outwards is the opposite of this. The carriage outwards is borne during the sale of goods, while the other one occurs during the purchase of goods.
Do You Know?
Carriage means shipping or transport expenses. It is the cost of transporting or shipping goods from a supplier to a business and the transportation cost of goods to the customers from a business. Another term used in accounting is the "Railage inwards”. The term is British, and it is defined as the transportation cost by a train (rail). In simpler terms, it refers to the expense of transporting goods to your desired business location through a train.
FAQs on Carriage Inwards vs. Carriage Outwards
1. What is carriage inward and outward entry?
Carriage inward and carriage outward are accounting terms used to record the cost of transporting goods. Carriage inward refers to the transportation cost paid by a business for bringing purchased goods to its premises, while carriage outward is the cost incurred to deliver sold goods to customers. These are entered into the books as follows: carriage inward is added to the cost of purchases and shown in the trading account, whereas carriage outward is recorded as a selling expense in the profit and loss account. Accurately distinguishing these entries is important for correct financial reporting and determining net profit or loss.
2. Is carriage outward a Debit or credit?
In accounting, carriage outward is treated as an expense linked to the delivery of goods to customers. All expenses increase with a debit entry, so carriage outward is recorded on the debit side of the profit and loss account. This treatment follows the standard accounting rule that expenses and losses are debited. Properly debiting carriage outward ensures expense accuracy and helps in calculating true net profit.
3. Is carriage inwards an expense or income?
Carriage inwards is considered an expense, not income. It is the cost incurred by a business to transport goods from the supplier to its own premises. Since it adds to the total cost of acquiring inventory or materials, it is debited as part of purchases in the trading account. Recognizing carriage inwards as an expense is key for accurately calculating the true cost of goods sold and assessing gross profit margins.
4. What are examples of carriage outward expenses?
Carriage outward expenses arise when a business pays to deliver goods to customers. These are typical expenses found in the selling and distribution section of the profit and loss account. Common examples include:
- Truck or van hire charges for delivering sold products
- Courier or transport company fees for dispatching goods
- Fuel and toll costs directly related to deliveries to customers
- Packing and handling fees paid during distribution
5. How does carriage inward affect the cost of goods sold?
Carriage inward increases the cost of goods purchased by including transportation expenses. When businesses pay to transport raw materials or inventory from suppliers, these costs are added to purchases in the trading account. This means the cost of goods sold (COGS) reflects both the purchase price and carriage inward, resulting in a more accurate calculation of gross profit. Failing to include carriage inward can understate costs and overstate profit margins.
6. Where are carriage inward and outward recorded in financial statements?
Carriage inward and carriage outward are recorded in different sections of financial statements based on their purpose.
- Carriage inward is added to purchases and shown in the trading account, which contributes to the cost of goods sold.
- Carriage outward appears as a selling and distribution expense in the profit and loss account, impacting net profit.
7. Why is it important to distinguish between carriage inward and outward?
Distinguishing between carriage inward and carriage outward is crucial for proper accounting and financial reporting. These two types of costs impact different financial statement areas and affect profit calculations in unique ways. Recording them correctly ensures that:
- The cost of goods sold includes all expenses related to acquiring goods (carriage inward)
- Selling and distribution costs reflect true delivery expenses (carriage outward)
8. Are carriage inward and carriage outward direct or indirect expenses?
Carriage inward and outward are classified differently based on their nature and impact. Carriage inward is a direct expense because it is directly linked to the cost of bringing goods to the business for resale or production. In contrast, carriage outward is considered an indirect expense as it relates to the delivery of goods already sold to customers. Understanding this distinction helps businesses allocate costs properly and produce accurate financial statements.
