Carriage inwards and carriage outwards, often referred to as freight in and freight out, are terms given to the costs incurred by a business of transporting goods. Carriage costs are normally incurred in relation to the transportation of inventory but can in fact relate to other items such as supplies of stationary, or non-current assets such as plant and machinery.
Carriage inwards refers to the cost of transporting goods from a supplier to the business.
Inventory Carriage Inwards Double Entry
In the case of inventory, the supplier supplies the goods and delivers them to the business’s premises. If the business pays the cost of transporting them, it is referred to as carriage inwards and added to the cost of the inventory held by the business.
For example, if a business purchases inventory costing 3,000 and incurs a transportation cost of 200, then the carriage inwards double entry journal, assuming the business operates a periodic inventory system, is as follows.
For the sake of clarity, we show carriage inwards as a separate line entry but in practice it can be posted to the purchases account.
Depending on the type of inventory accounting system the business operates, carriage inwards might be posted to either directly to inventory, to purchases or to a separate carriage inwards account.
Irrespective of the account the carriage inwards cost is recorded in, it becomes part of the inventory cost until the inventory is sold. When the inventory is sold the carriage costs are transferred with that inventory and become part of the cost of sales in the income statement, and therefore reduces the gross margin of the business.
Non-Current Asset Carriage Inwards Double Entry
When a business purchases a non-current asset for use within the business such as an item of plant and machinery, the carriage inwards cost of having that asset delivered to its correct location within business will be treated as part of the cost of acquiring the asset and capitalized, that is to say included as part of the cost of the asset.
For example, if an item of equipment costing 50,000 incurs a delivery cost of 2,500, the carriage inwards double entry will be as follows.
|Equipment – carriage inwards||2,500|
Again, for the sake of clarity, we show carriage inwards as a separate line item. It should be noted that since the carriage inwards cost has been posted to the asset account, it will be depreciated at the same rate as the asset itself and treated as part of the depreciation expense in the income statement of the business.
Carriage inwards might also be incurred on items not held as an asset of the business such as for example stationery and sundry supplies, or might be of such a minor amount as to make it not worth including it in the cost of the asset. In such instances, the cost of carriage inwards is treated as an expense and included in the income statement in the period incurred.
Carriage outwards refers to the costs of transporting goods which have been sold from the business to its customers.
Since the cost of carriage outwards is incurred when the business sells its products, it is treated as an expense in the income statement and included under the heading of sales and marketing or selling and distribution expenses.
Carriage Outwards Double Entry
Suppose a business sells a product to a customer and incurs delivery charges of 150. The costs incurred in transporting the goods to the customers are carriage outwards costs and the double entry to record the expense incurred is as follows.
Carriage outwards is a cost of selling included as part of the operating expenses of a business, and therefore does not effect the gross profit of the business.
Carriage outwards is sometimes referred to a freight out. In freight out accounting, a business may recharge the customer indirectly by increasing the selling price of the product to allow for freight out, or it might directly recharge the customer for the actual cost. If the freight out is recharged, then the income received from the customer can be netted off against the freight out expense to give a net freight out cost.
Carriage Inwards and Carriage Outwards Example
A business purchases goods from a supplier, paying the costs of having the goods delivered to its warehouse, and then sells the products to its customers, incurring delivery costs on each sale.
Suppose the business had a beginning inventory of 5,000, made purchases during the accounting period of 20,000, and incurred transportation costs of 3,000 to have the goods delivered to its warehouse.
During the accounting period the business makes sales of 50,000 and incurs delivery costs for transporting the goods to its customers amounting to 2,000, together with additional general and administrative expenses of 6,000. At the end of the accounting period the inventory held in the warehouse amounted to 8,000.
The cost of transporting the goods from the supplier to the warehouse is carriage inwards and amounts to 3,000. This cost is a necessary cost of getting the inventory to its current location and condition in the warehouse ready for sale, and can therefore be included as part of the cost of purchasing the inventory.
The cost of delivering the product to customers of 2,000, is carriage outwards and is a selling cost to be included as an expense under the heading of sales and marketing expenses in the income statement.
Extracts from the Income Statement
Extracts from the income statement would show the following in relation to the treatment of carriage inwards and carriage outwards costs.
|Cost of goods sold||20,000|
|General and administrative||6,000|
Carriage inwards and carriage outwards are both included in the income statement but are treated differently. Carriage inwards forms part of the inventory cost and that relating to goods sold to customers is included in the cost of sales and reduces the gross profit of the business.
Carriage outwards relating to the delivery of the goods to customers, is included as part of the sales and marketing costs of the business. This cost becomes part of the operating expenses of the business and reduces the operating income but not the gross profit of the business.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.