In accounting, carriage inwards and outwards are different types of expenses incurred by companies when they buy and sell goods. One charge is incurred when goods are procured from suppliers; the other is incurred when the goods are sold to a consumer.
The term carriage refers to the costs of transporting goods from a supplier to a business. It can also be used when referring to the costs associated with transporting goods from a business to customers.
Business operations today occur on national and international levels. This means businesses must rely on many sources from a variety of geographical locations. There may be many legs to a distribution channel. Local goods may incorporate road or rail transportation options. International transport may require air or water transport options. Carriage inwards and outwards looks at the various modes of transport.
What is Carriage Inwards?
When a business purchases raw materials or goods, it will have to transport them to its own store, warehouse, or factory. The cost to transport the goods from the seller to the buyer is carriage inwards. It refers to the cost incurred when an inward flow of goods for the business occurs. Carriage inwards cost is typically paid by buyers.
Another term often used for carriage inwards is Freight In. Carriage Inwards is borne by the supplier and in accounting, it is added to the cost of purchased products. On the balance sheet, Carriage Inwards is listed as an asset. It is also found in the Income Statement under the Cost of Goods Sold, depending on how the company does its accounting.
Carriage inwards expenses are incurred when a business transports items from a supplier. It’s the cost associated with a purchased asset, usually goods or stock. The business does not incur carriage inwards costs if the supplier pays for the delivery of the items purchased. If the business pays to ship the purchased items at the point of sale, the carriage inwards cost may be included as part of the cost of the asset.
What is Carriage Outwards
Carriage Outwards is incurred during an outward flow of goods from a business. The cost is classified as selling costs. The costs, even though paid by sellers, can be borne by either the seller or the buyer. It depends on the terms of the transaction. If they are borne by the seller, they will be debited as an expense in their profit and loss account. Carriage outwards costs appear in the income statement in the same reporting period to which the transaction relates. It appears in the cost of goods sold section.
When a business sells a product, the freight or shipping costs for sending the items to the purchaser are carriage outwards costs. Carriage outwards is a revenue expense for a business. It will appear on the debit side of the income statement.
What are the Differences Between Carriage Inwards and Carriage Outwards?
Carriage inwards and carriage outwards are two types of expenses incurred by a business when buying and selling goods. They are often treated alike inside the trial balance. But there is a distinct difference between the two.
Listed below are the differences between carriage inwards and carriage outwards.
- Meaning: Carriage inwards are costs incurred when goods or raw materials are obtained from a supplier. Carriage outwards is the cost incurred by sellers when shipping or delivering goods sold.
- Incurred On: Carried inwards is incurred on purchases of goods for resale, capital goods, or raw materials. Carriage outwards is incurred on the sale of inventory by the seller.
- Incurred By: Carriage inwards is incurred at the time of the purchase by the buyer. Carriage outwards is incurred at the time of the sale or delivery of goods by the seller.
- Borne By: Carriage inwards is borne by buyers of goods. It may be paid separately or added to the purchase price of the goods. Carriage outwards may be borne by sellers or buyers. It will depend on the terms of sale between the two.
- Type of Cost: Carriage inwards is a direct cost. It forms part of the cost of goods for buyers. Carriage outwards is an indirect cost and is part of the selling and distribution costs for sellers.
- Accounting Impact: The buyer accounts for carriage inwards. It is debited in their trading account. The seller accounts for carriage outwards. It is debited to their profit and loss statement in accounting.
- Capitalization of Cost: The buyer capitalizes carriage inwards in the purchase of capital goods. There is no scope for capitalization for carriage outwards since it is a pure revenue cost for sellers.
- Profitability Impact: Carriage inwards has an impact on the buyer’s gross profitability. Carriage outwards has an impact on the seller’s net profitability.