This blog explores the meaning, accounting treatment, and financial effects of carriage inward vs carriage outward to help you accurately record and analyse logistics costs in business.
What Is Carriage Inward?
Carriage inward refers to the transportation or freight costs a business incurs when purchasing goods and bringing them to its own premises. This cost is essential in situations where a supplier does not cover shipping, and the buyer must arrange for the movement of inventory or raw materials to its facility.
- It is incurred by the buyer.
- Categorised as a direct expense.
- Recorded in the Trading Account.
- Known as freight-in or transportation-in in some accounting systems.
Carriage inward directly contributes to the acquisition cost of inventory. When goods are transported from a vendor to a company, the incurred cost must be added to the total purchase value of the goods. This ensures that the cost of goods sold (COGS) is calculated accurately. A misclassification can distort gross profit margins.
Example:
If a business buys 100 units of raw material for ₹1,000 each, the purchase cost is ₹100,000. If ₹5,000 is spent on carriage inward, the total inventory value becomes ₹105,000. This cost will be reflected in the trading account and contribute to the total cost of production or resale.
Understanding what is carriage inwards is crucial for businesses that depend heavily on imported materials or frequently source from distant suppliers.
What Is Carriage Outward?
Carriage outward is the cost incurred by a seller to deliver goods to the customer. Unlike carriage inwards, this is an operational or selling expense and does not contribute to the inventory’s value.
- It is incurred by the seller.
- Categorised as an indirect expense.
- Recorded in the Profit & Loss Account.
- Also referred to as freight-out or transportation-out.
Carriage outward reflects the cost of providing service to customers post-sale. It influences net profit and is treated like other selling and distribution expenses. Businesses often choose to absorb carriage outward to improve customer satisfaction, but this decision impacts profitability.
Example:
A seller dispatches goods worth ₹75,000 and pays ₹2,500 for delivery. This ₹2,500 is recorded as a carriage outward expense in the P&L account. It does not affect the cost of goods sold but reduces the overall net profit.
To understand what is carriage outwards, it’s important to recognise that this cost is not linked to production or acquisition but to distribution.
Accounting Treatment of Carriage Inwards
Carriage inwards is added to the purchase cost. It increases the inventory value and is not expensed directly (unless immaterial).
Journal Entry:
Purchase A/c    Dr
Carriage Inwards A/c Dr
    To Bank/Cash A/c
This treatment ensures accurate calculation of the gross profit, as all acquisition costs are bundled into the cost of goods sold.
In the trading account, carriage inwards appears on the debit side along with purchases. It contributes directly to the total expenses incurred in acquiring goods ready for sale.
- For manufacturing units, it may be included in the cost of raw materials.
- If goods are bought for capital use (e.g., machinery), carriage inward is capitalised along with the asset.
Accounting Treatment of Carriage Outwards
Carriage outward is an indirect expense and is recorded in the Profit & Loss Account.
Journal Entry:
Carriage Outwards A/c Dr
    To Bank/Cash A/c
- Appears on the debit side of the Profit & Loss Account.
- Treated as a selling and distribution expense.
Since it is not related to goods acquisition, it does not affect the cost of goods sold or gross profit. It affects net profit. Many companies attempt to reduce carriage outward costs by optimising logistics or passing them on to customers.
Curious About Carriage Inward vs Carriage Outward?
Effects on Financial Statements (Trading vs P&L)
| Criteria | Carriage Inward | Carriage Outward |
| Incurred By | Buyer | Seller |
| Type of Expense | Direct | Indirect |
| Related To | Purchase | Sales |
| Recorded In | Trading Account | Profit & Loss Account |
| Affects | Gross Profit | Net Profit |
| Capitalisation Possible? | Yes (for capital goods) | No |
| Common Names | Freight-in, transport-in | Freight-out, delivery charges |
| Example of Use | Buying inventory from supplier | Delivering goods to a customer |
This distinction between carriage inwards and outwards is pronouncedly relevant to the person preparing financial statements or managing business accounts.
Typical Journal Entries and Examples
While understanding the practical differences between carriage inward vs carriage outward, it is vital to record both these terms in the books of accounts. Detailed illustrations showing different business situations and depicting proper accounting treatments have been given below.
Example 1: Carriage Inwards on Purchases
Scenario: A manufacturing firm procures goods worth ₹50,000 from a vendor. Since the terms of delivery require the buyer to bear the transportation cost, an additional ₹2,000 is paid as carriage inward.
Journal Entry:
Purchase A/c        Dr ₹50,000 Â
Carriage Inwards A/c    Dr ₹2,000 Â
      To Bank/Cash A/c      ₹52,000
In this case, the transportation cost is not distinguished from the purchase price in the monetary evaluation. It forms part of the inventory value and will affect the cost of goods sold when the products are finally disposed of.
Trading Account Impact:
Purchases: ₹50,000 Â
Add: Carriage Inwards: ₹2,000 Â
Total Purchases: ₹52,000
In this case, both purchases and carriage inward are debited in the trading account, thereby affecting gross profit.
Example 2: Carriage Outwards on Sales
Scenario: A wholesaler sells goods worth ₹70,000 to a customer in another city. The company passes on no delivery charges to the customer and pays ₹3,000 for logistics.
Journal Entry:
Carriage Outwards A/c   Dr ₹3,000 Â
      To Bank/Cash A/c      ₹3,000
Such delivery charges are not added to the cost of goods sold but are rather recorded as an indirect expense in the Profit & Loss account. This shows the company’s selling and distribution overheads.
Profit & Loss Account Impact:
Selling & Distribution Expenses:
  – Carriage Outwards: ₹3,000
This charge directly lowers the net profit but does not affect the computation of gross profit.
Example 3: Capital Goods Purchased with Carriage Inward
Scenario: A business buys a new piece of machinery that costs ₹200,000. The business also incurs a cost of ₹10,000 towards transportation to bring the machine to its premises.
Journal Entry:
Machinery A/c       Dr ₹210,000 Â
      To Bank/Cash A/c      ₹210,000
Here, carriage inward has been capitalised as it helps in bringing an asset into usable condition. It is not recorded in the journal or P&L account but instead forms part of the book value of the asset. This total value is then depreciated over the useful life of the asset.
Impact on Financials:
- The machinery’s value in the balance sheet becomes ₹210,000.
- Depreciation is calculated on the full amount, including carriage inward.
Example 4: Export Order with Carriage Outwards Paid by Seller
Scenario: An export company exports finished goods valued at ₹300,000. It spends ₹25,000 as international freight charges to ensure proper delivery and preservation of export quality.
Journal Entry:
Carriage Outwards A/c    Dr ₹25,000 Â
      To Bank/Cash A/c      ₹25,000
This substantial cost is recorded in the Profit & Loss Account under operating expenses. Exporting companies often include such charges under a broader head like logistics and freight, but the core treatment remains the same, an indirect expense.
P&L Account Impact:
Operating Expenses:
  – Carriage Outwards (International Freight): ₹25,000
It affects the net profit, but since the sale value already excludes these costs, the gross profit remains unchanged.
Each example demonstrates that the accounting treatment for carriage inward and outward depends on:
- Whether the cost is part of acquiring an asset or inventory.
- Whether the cost is related to sales or operations.
- Who bears the cost, the business or the customer.
Proper classification ensures that carriage inwards and outwards are allocated to the correct financial statement, allowing for better profitability analysis and cost control. Misclassification can lead to misleading gross margins or understated operating costs. Gaining an ACCA certification can help you master these accounting principles and apply them accurately in real-world financial reporting.
Recording these entries with proper narration and in the correct ledgers also ensures easier audit trails and smoother compliance processes.
Planning to Pursue Accounting and Finance Career?
To Book Your Free Counselling Session
FAQs on Carriage Inward vs Carriage Outward
How do I record carriage inwards in my trading account?
Carriage inwards is recorded by debiting the Carriage Inwards account and crediting Bank or Cash. It is then added to the purchases in the Trading Account.Â
Why is carriage outwards treated as an indirect expense on the Profit & Loss account?
Because carriage outwards occurs after the sale and relates to delivery, it is not part of the product’s cost. Hence, it is an indirect expense, shown separately in the Profit & Loss Account.
Can carriage inwards ever be expensed immediately rather than capitalised into inventory cost?
Yes, if the amount is insignificant or goods are not for resale (e.g., office supplies), carriage inwards can be expensed directly. But for goods that form part of inventory, it should be capitalised.
How do carriage costs impact gross profit and net profit calculations?
- Carriage Inwards increases the cost of goods sold → reduces gross profit.
- Carriage Outwards is a selling expense → reduces net profit.
