Today, the business operations take place across national as well as international borders. To produce their goods and services, business entities often rely on inputs sourced from various geographical locations. Also they sell their output across different geographical locations. This entails transportation costs at several legs of the distribution channel – road or rail transport in case of local supplies and air or water transport in case of national or international supplies.
The article “carriage inwards vs carriage outwards” looks at meaning of and differences between the two types of transport payments – carriage inwards and carriage outwards.
Definitions and meanings
Carriage inwards is the transportation cost incurred on goods purchased by a business. When an entity purchases goods or raw materials, it need to transport them from seller’s factory or warehouse to its own factory, warehouse or store. All transportation costs required for this transit constitute carriage inwards. This cost is incurred when there is an inward flow of goods for the entity, thus giving it the name ‘carriage inwards’.
Carriage inwards are typically incurred on various raw materials and inputs purchased by manufacturing entities as well as on finished goods procured by trading entities. However, It can also be incurred when a capital asset is purchased and transported to the entity or its place of installation.
It is a direct cost incurred to manufacture or bring the goods in a saleable condition and thus forms part of the cost of goods sold (COGS) of the business. In case of capital assets, carriage inwards may be capitalized to the cost of asset.
Carriage inwards cost is usually borne by the buyer. They can be paid separately or can be included in the price of the goods depending on the pricing terms agreed between buyer and seller. In case of Free on Board (FOB) terms, only cost of the initial shipping forms part of the quoted sales price of the goods. Any subsequent transportation costs incurred for the goods to reach the buyer’s destination have to be paid for separately by the buyer. In case of Carriage, Insurance, Freight (CIF) terms, the carriage inwards cost up to the buyer’s destination is included in the quoted price.
The journal entry for carriage inwards in the books of accounts of the buyer is:
Carriage inwards a/c*…..XXX [Dr]
Cash a/c…..XXX [Cr]
(Being entry recorded for payment of carriage inwards)
*Carriage inwards is transferred to the trading account
Carriage outwards is the cost of transportation incurred by the seller when it sells goods to the buyer. When a seller sells goods, it sends them to the buyer by an agreed mode of transportation and the transportation costs incurred for this purpose is known as carriage outwards. This cost is incurred when there is an outward flow of goods from the business, thus giving it the name ‘carriage outwards’.
Carriage outwards cost is incurred in order to complete the sale of goods and thus is classified as selling costs. This cost is debited to the profit and loss account after determination of gross profit and is posted as a part of selling and distribution costs.
These costs, though paid by the seller, may be borne either by the buyer or seller depending on the terms of the sales transaction. In case they are borne by the seller, they are debited as expenses in the seller’s profit and loss account.
The journal entry passed in the books of accounts of the seller is:
Carriage outwards a/c*…..XXX [Dr]
Cash a/c…..XXX [Cr]
(Being entry recorded for payment of carriage outwards)
*Carriage outwards is transferred to the profit and loss account
In case carriage outward is initially paid by the seller but is to be ultimately born by the buyer, its recovery is recorded by the seller as revenue in his books in the same period as which the expense was recorded.
Difference between carriage inwards and carriage outwards:
The key points of difference between carriage inwards and carriage outwards have been detailed below:
- Carriage inwards is the freight/transport cost incurred by the buyer on the purchase of raw materials or goods.
- Carriage outwards is the freight/transport cost incurred by the seller in shipping or delivering goods sold by it.
2. Incurred on
- Carriage inwards is incurred on purchases of raw materials, goods for resale or capital goods.
- Carriage outwards is incurred on sale of goods i.e., inventory of the seller.
3. Incurred by
- Carriage inwards is incurred by the buyer at the time of purchase.
- Carriage outwards is incurred by the seller at the time of sale/delivery of goods.
4. Borne by
- Carriage inwards is borne by the buyer of the goods. It may be loaded into the purchase price of the goods or may be paid for separately.
- Carriage outwards may be ultimately borne either by the seller or the buyer depending on the terms of sale between both entities.
5. Type of cost
- Carriage inwards is a direct cost and forms part of cost of goods for the buyer.
- Carriage outwards is an indirect cost and forms part of selling and distribution cost for the seller.
6. Accounting impact
- Carriage inwards is accounted for in the books of accounts of the buyer, being debited to the trading account.
- Carriage outwards is accounted for in the books of accounts of the seller, being debited to the profit and loss account.
7. Capitalization of cost
- Carriage inwards may be capitalized to the cost of asset in case of purchase of capital goods by the buyer.
- Carriage outwards is a pure revenue cost for the seller and thus there is no scope for its capitalization.
8. Profitability impact
- Incurrence of carriage inwards impacts the gross profitability of the buyer.
- Incurrence of carriage outwards impacts the net profitability of the seller.
Conclusion – carriage inwards vs carriage outwards:
Modern businesses especially those involving international transactions (both import and export) tend to have complex sale terms with respect to transportation terms and conditions. Very often the transportation costs may be split between buyer and seller. For example, when goods are sold on FOB basis, seller has to bear the cost of carriage outwards till the goods are shipped whereas the buyer will have to bear all subsequent transport costs to receive the goods at his destination. Appropriate categorization and accounting of these costs in the books of buyer and seller will thus depend on the terms of transaction between the two parties.