Inward carriage is the cost of transportation to the business, bringing commodities or raw materials from a supplier to its premises. An essential part of accounting, the cost of carriage inwards must be ascertained when the average cost of acquisitions and inventory is considered. Carriage inwards, as it adds directly to the value of goods purchased, is, thus, a direct expense and forms a crucial part of the detailed presentation of financial statements, especially the preparation of a trial balance, a trading account, and final accounts. Businesses need to learn how to account for carriage inwards since it can calculate the true cost of inventory and maintain accurate profit margins.
Carriage Inwards Meaning
Carriage inwards is the freight that a business pays to bring goods or raw materials to its premises. Freight, generally speaking, is paid when the delivery cost is bore by the seller and the transportation cost of the consignment is to be borne by the buyer. As this cost directly relates to acquiring inventory, in accounting, this is treated as a direct expense.
It is an important cost for companies that have the constant shipment of raw materials or stock, as it gets carried into the total inventory cost. Assuming a manufacturer buys raw materials amounting to ₹10,000 and pays for transportation charges amounting to ₹500 on them, then the entire cost will be ₹10,500. The ₹500 is a carriage inwards cost.
Importance of Carriage Inwards
- Accurate Inventory Valuation: This would ensure that all the proper cost of buying commodities is reflected in the books; thus, it has to have an accurate inventory valuation.
- Direct Expense: This is a direct expense since it directly relates to the cost of goods sold.
- Impact on Profit Margins: The inclusion of carriage inwards into financial records assists the business in knowing its true cost of production or acquisition in determining its pricing decision and profit margin.
Carriage Inward in Trial Balance
Carriage inwards is recorded on the debit side of the trial balance as it is an expense incurred directly at the time of purchase, according to the general procedure in a trial balance. Hence, it is essential that, in the trial balance, the carriage inwards must be correctly recorded because all the expenses incurred to obtain such items for sale will then be included in the costs of items applied for in the financial statements of subsequent periods.
Example:
Suppose a company purchases goods worth ₹50,000 and incurs ₹2,000 as carriage inwards. In the trial balance, carriage inwards will appear on the debit side as follows:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Purchases | 50,000 | |
| Carriage Inwards | 2,000 | |
| Total | 52,000 |
Here, the carriage inwards increases the total cost of purchases, which will subsequently affect the financial statements when calculating the cost of goods sold (COGS).
Key Points:
- Nature: Direct expense
- Treatment: Recorded on the debit side of the trial balance
- Impact: Contributes to the overall cost of purchases and is included in the cost of goods sold calculation.
Carriage Inward in Trading Account
Adding the carriage inwards to the cost of purchases in the trading account gives the cost of goods sold or COGS. This is one of the essential requirements for calculating gross profit. Gross profit is obtained by subtracting the cost of goods sold from net sales. Without including this line item, the gross figure would come out inflated because the cost of goods sold would be understated.
Formula for Cost of Goods Sold:
Cost of Goods Sold = Opening Stock + Purchases + Carriage Inwards – Closing Stock
Example in a Trading Account
Imagine a company with the following details:
- Opening stock: ₹5,000
- Purchases: ₹20,000
- Carriage inwards: ₹1,000
- Closing stock: ₹3,000
In the trading account, carriage inwards would be added to the purchases:
| Particulars | Amount (₹) |
|---|---|
| Opening Stock | 5,000 |
| Add: Purchases | 20,000 |
| Add: Carriage Inwards | 1,000 |
| Less: Closing Stock | (3,000) |
| Cost of Goods Sold (COGS) | 23,000 |
Adding carriage inwards increases the total cost of goods sold from₹22,000 ₹ 22,000 to ₹ 23,000 and therefore the gross profit decreases. Carriage inwards omitted will result in an undervaluation of the cost of goods sold, which may lead to an inappropriate figure for gross profit.
Significance in the Trading Account
- Accurate Gross Profit Calculation: It ensures the true cost of acquiring goods to form an accurate gross profit.
- Direct Impact on COGS: Since it directly affects the cost of goods sold, carriage inwards would affect gross profit and profitability.
- Correct Expense Allocation: Businesses may allocate transportation expenses to the proper phase of the production or purchase process using ‘carriage inwards’.
Carriage Inward in Final Accounts
In final accounts, carriage inwards is not accounted for as a separate item but is included in the general running total of the cost of goods sold. It is added to the total purchase amount to reflect the proper cost of inventory purchases. This inclusion is very crucial for the correct presentation of the company’s financial performance.
Treatment in Final Accounts
- Profit & Loss Account: Carriage inwards does not appear as a separate heading; it appears with the other elements of cost under the head total cost. Thus having an impact on the gross profit.
- Balance Sheet: It may affect the closing stock and the amount of current assets since carriage inwards affects the inventory.
Example:
If a business fails to account for carriage inwards correctly, the closing stock would be undervalued, leading to inaccurate asset reporting. For instance, if carriage inwards amounts to ₹2,000 and the inventory is initially valued at ₹50,000, the correct valuation should be ₹52,000.
Neglecting to include carriage inwards would lead to:
- Undervaluation of Inventory: The total cost of the inventories will be inadequately valued in the balance sheet.
- Increased Gross Profit: Omission of carriage inwards would increase the cost of goods sold, which in turn would increase the gross profit.
Difference Between Carriage Inward and Carriage Outwards
It is essential to distinguish between carriage inwards and carriage outwards, as they represent different types of transportation costs with unique accounting treatments.
| Aspect | Carriage Inwards | Carriage Outwards |
|---|---|---|
| Definition | Affects the cost of goods sold and inventory valuation | Cost incurred to deliver goods to customers |
| Accounting Treatment | Treated as a direct expense and added to the cost of goods | Treated as a selling/distribution expense in the Profit & Loss account |
| Impact on Financials | Affects cost of goods sold and inventory valuation | Affects distribution costs and operating expenses |
| Example | Transportation costs for acquiring raw materials | Delivery charges for shipping finished products to customers |
Key Differences
- Carriage Inwards: This is the cost to the company to bring the goods into the premises; it is over and above the purchase cost and impacts both the inventory and the cost of goods sold.
- Carriage Outwards: The cost of delivering the product to the customer is termed carriage outwards. It forms the distribution cost and hence is added to the operating expenses.
Carriage Inwards FAQs
Is carriage inwards a direct expense?
Yes, carriage inwards is a direct expense as it directly relates to the cost of acquiring goods or raw materials for the business.
Where is carriage inwards recorded in the trial balance?
Carriage inwards is recorded on the debit side of the trial balance as it increases the cost of purchases.
What is the impact of carriage inwards on the trading account?
In the trading account, carriage inwards is added to purchases to calculate the cost of goods sold (COGS), impacting the gross profit.
Does carriage inwards affect inventory valuation?
Yes, carriage inwards increases the value of inventory since it is included in the total cost of acquiring goods or raw materials.
How does carriage inwards differ from carriage outwards?
Carriage inwards refers to transportation costs for bringing goods into the business, whereas carriage outwards refers to the cost of delivering goods to customers.
