Understanding Carriage Inwards and Carriage Outwards
In the world of accounting, it is important to understand the different types of expenses that a company can incur. Two expenses that are often confused are carriage inwards and carriage outwards. In this article, we will discuss the differences between these two expenses and how they can impact a company's financial statements.
Carriage Inwards
Carriage inwards refers to the transportation costs incurred by a company when purchasing goods. This can include the cost of shipping, handling, and other transportation expenses. These costs are typically added to the cost of the purchased goods and are included in the inventory valuation.
It is important to note that carriage inwards is not a separate expense account. Instead, it is included in the cost of goods sold or the inventory account, depending on the accounting method used by the company. In other words, if a company uses the perpetual inventory system, the carriage inwards expense will be added to the inventory account, whereas if the company uses the periodic inventory system, the expense will be added to the cost of goods sold account.
Carriage Outwards
Carriage outwards, on the other hand, refers to the transportation costs incurred by a company when selling goods. This can include the cost of shipping, handling, and other transportation expenses. These costs are typically expensed in the period in which they are incurred and are recorded as a separate expense account.
It is important to note that carriage outwards is not included in the cost of goods sold or the inventory account. Instead, it is recorded as a separate expense account, such as selling expenses or freight expenses.
Impact on Financial Statements
Understanding the differences between carriage inwards and carriage outwards is important because it can impact a company's financial statements. As mentioned earlier, carriage inwards is included in the cost of goods sold or the inventory account, whereas carriage outwards is recorded as a separate expense account.
If a company has a high amount of carriage inwards, it will increase the cost of goods sold or the inventory valuation, which can decrease the company's gross profit margin. On the other hand, if a company has a high amount of carriage outwards, it will increase the selling expenses and decrease the company's net profit margin.
Conclusion
In conclusion, carriage inwards and carriage outwards are two important expenses that are often confused in the world of accounting. Carriage inwards refers to transportation costs incurred when purchasing goods and is included in the cost of goods sold or the inventory account, whereas carriage outwards refers to transportation costs incurred when selling goods and is recorded as a separate expense account. Understanding the differences between these two expenses is crucial for accurate financial reporting and decision-making.
