There are several expenses that a business firm incurs. One of these is a carriage, which refers to the cost of transportation of goods to and from the business. There are two types of carriage expenses which a business incurs – carriage inwards and carriage outwards.
Carriage Inwards
What is Carriage Inwards?
Carriage Inwards is the delivery charge from the point of view of the buyer. It is also known as transportation inwards or freight inwards.
- When a business purchases goods or materials from a supplier, the cost incurred is known as carriage inwards.
- This expense includes the cost associated with the transportation of goods from the supplier’s to the place of business of the buyer.
- The Carriage Inwards cost is included as a part of the purchased goods.
Example:
- A company based in Mumbai purchases hand tools from a supplier located in New Delhi.
- The Carriage Inwards in this case would include the transportation expenses of the hand tools from Mumbai to New Delhi.
- These expenses may include the freight charges, loading and unloading charges, and the transportation charges, and also any other expenses pertaining to getting the goods to the buyer’s premises in Mumbai.
Importance
Here is the importance of carriage inwards.
| Importance | Description |
| Accurate determination of profit margins | For determining the exact profitability in financial statements, a business needs to correctly account for Carriage Inwards expenses.
Overlooking these expenses may result in incorrect profit margins. |
| Addition to the cost of purchased goods | Carriage Inwards is included in the cost of goods sold. Thus, a business gets a more accurate representation of the total cost of procuring the goods. |
| Tax deductions | In certain jurisdictions in India, Carriage Inwards expenses are tax deductible.
This means that a business can reduce a taxable income with precise record-keeping of |
Also Read: Place of Supply for Transportation and Logistic Services: Point of Origin and Destination
Recording Carriage Inwards
Here is the step-by-step process for recording carriage inwards.
Step 1: Identification of expenses
Gather all the relevant bills and receipts pertaining to the transportation of goods.
Step 2: Creating an account
In the accounting software, create an account for Carriage Inwards expenses.
Step 3: Recording the expenses
Record the Carriage Inwards expenses by entering the relevant details. For example, date, supplier, description of goods, and the paid amount.
Step 4: Inclusion in the cost of goods sold
Included the total Carriage Inwards expense as a part of the total inventory cost when calculating the cost of goods sold for a specific period.
Step 5: Reconciliation
Regular reconciliation of the Carriage Inwards account is vital to ensure perfection and avoid any hassles at a later stage.
Carriage Outwards
What is Carriage Outwards?
- Carriage Outwards refers to selling and distribution costs to the business.
- It refers to the transportation cost incurred by a business when delivering goods to its customers.
- It basically pertains to the expenses of shipping goods away from the business premises to customers or any other location.
- It is also known as transportation outwards or freight outwards.
- At the end of the accounting period, the Carriage Outwards account is written off to the Profit and Loss Account of a business.
Example:
- A company based in Mumbai sells its products to a customer in Bengaluru.
- This sale would require transportation of goods to the buyer’s location in Bengaluru.
- Carriage Outwards includes expenses such as packaging costs, shipping charges, handling charges, insurance during transport, and any other expense associated with transporting the goods to Bengaluru.
- In the company’s financial records, this expense is considered as selling and distribution cost.
Importance
Here is the importance of Carriage Outwards for a business.
| Importance | Explanation |
| Accurate analysis of profitability | By precisely accounting for Carriage Outwards expenses, it is possible for a business to analyze its profitability accurately.
This helps to analyze the expenditure associated with sales and revenue generation. |
| Determining the pricing strategies | With Carriage Outwards cost, a business can set the correct pricing strategies.
This ensures that the selling price of a product includes both the production expenses and delivery cost. |
| Inclusion in the cost of sales | Carriage Outwards expenses are added to the cost of sale or cost of revenue.
This indicates the cost associated with revenue generation. |
Also Read: Comprehensive Transport Documents: The Backbone of Smooth and Compliant Goods Movement
Recording Carriage Outwards
Here is the step-by-step process for recording Carriage Outwards.
Step 1: Gathering the relevant documents
Gather all the relevant bills and receipts pertaining to the transportation of goods to the customer.
Step 2: Creating an account
In the accounting software, create an account for Carriage Outwards expenses.
Step 3: Recording the expenses
Record the Carriage Outwards expenses by entering the relevant details. For example, date of shipping, place of shipping, description of goods, and the amount spent.
Step 4: Inclusion in the cost of sales
Included the total Carriage Outwards expense to represent the cost associated with revenue generation when calculating the cost of goods sales or cost of revenue for a specific period.
Step 5: Reconciliation
Regular reconciliation and review of the Carriage Outwards account is vital to ensure accuracy.
Difference between Carriage Inwards vs Carriage Outwards
Here are the major difference between Carriage Inwards and Carriage Outwards
| Parameter | Carriage Inwards | Carriage Outwards |
| Direction | Transportation costs associated with procuring the goods from suppliers. | Transportation costs associated with delivering goods to the customers. |
| Recording | Recorded in Income Statement as Cost of goods sold. | Recorded in Income Statement as Cost of sales or cost of revenue. |
| Use | Accurate determination of cost of inventory and calculating the cost of goods sold. | Accurate assessment of cost associated with goods sold. |
| Effect | Impact the profitability of a company by impacting the profit margins. | Impacts the overall cost structure of revenue generation. |
For any business in India, understanding the difference between Carriage Inwards and Carriage Outwards is essential. This helps businesses accurately maintain important financial data and make informed decisions. By recording and analyzing the information about Carriage Inwards and Carriage Outwards, businesses can get complete clarity on their finances and boost their profitability.
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