Carriage Inwards Meaning

Explanation

Carriage inwards Freight inwards, or transportation inwards are the charges borne for transporting goods from the supplier’s place to the location of the customer. Freight inwards may or may not always be capitalized. However, this depends on the type of assetThe Type Of AssetAssets are the resources owned by individuals, companies, or governments expected to generate future cash flows over a long period. There are broadly three types of asset distribution: 1. Based on convertibility (current and non-current assets), 2. Physical existence (tangible and intangible assets), 3. Usage (operating and non-operating assets)read more purchased. It must be treated as a direct expense, and the entry for the same must be posted on the debitDebitDebit represents either an increase in a company’s expenses or a decline in its revenue. read more side of a buyer’s trading account. Carriage-in is a part of the cost of the purchased goods (cost of goods sold, cost of inventory, and cost of the items available).

Example of Carriage Inwards

What will be the journal entry for $10 paid as charges towards Freight inwards in cash towards purchasing goods worth $10,000?

Solution

Difference Between Carriage Inwards and Carriage Outwards

  • Other Names: Carriage inwards is also known as transportation-inwards or transportation-in or freight-in or freight-inwards, while carriage outwards is also known as transportation-outwards or freight-outwards.Meaning: Carriage inwards can be learned as freight and transportation costs incurred during the transportation of goods from the supplier’s warehouse to the warehouse of the buyer. On the other hand, carriage outwards can be learned as freight and transportation costs incurred by a company while selling off its goods. In other words, Freight inwards is borne during the purchase of goods, whereas carriage outwards during the sale of goods.Treatment: It receives treatment similar to that of a direct expense, whereas carriage outwards receives treatment identical to that of an indirect expenseAn Indirect ExpenseIndirect expenses are the general costs incurred for running business operations and management in any enterprise. In simple terms, when you want to buy grocery from a supermarket, the transportation cost to get you to the supermarket and back is the indirect expenses.read more.Capitalization: The capitalization of Freight inwards may or may not take place, and it depends on the asset bought. On the other hand, carriage outwards is not capitalized at all.Reflection in a Statement: The entries about the carriage inwards are posted in the trading account, whereas the entries about the Freight outwards are posted in the income statement or profit and loss accountProfit And Loss AccountThe Profit & Loss account, also known as the Income statement, is a financial statement that summarizes an organization’s revenue and costs incurred during the financial period and is indicative of the company’s financial performance by showing whether the company made a profit or incurred losses during that period.read more.Debit/Credit Side: The entries about the Freight inwards are posted on the debit side of the trading account, whereas the entries about the carriage outwards are posted on the credit side of an income statementIncome StatementThe income statement is one of the company’s financial reports that summarizes all of the company’s revenues and expenses over time in order to determine the company’s profit or loss and measure its business activity over time based on user requirements.read more or profit or loss account.Responsibility: The buyer is mostly responsible for paying off the carriage inwards charges, whereas in the case of Freight outwards, it is the seller or the supplier who is primarily responsible for paying off these charges.Journal Entry: Journal entry for inward carriage varies on the element and the purpose behind its use.

Carriage Inwards – Debit or Credit?

Example #1

When Freight inwards is paid during the purchase of inventory –

The journal entry passed when it is spent on buying the inventory is:

The journal entry passed for transferring carriage inwards to the trading account and added to the COGS or cost of goods sold is:

The journal entries in the case of carriage outwards are:

When carriage outwards is paid from bank account:

When carriage outwards is transferred to the income statement or profit and loss account:

Example #2

Journal entries passed during the purchase of an inventory are –

The journal entry passed when carriage inwards is paid on buying the inventory is:

The journal entry passed for transferring freight inwards to the trading account and added to the COGS or cost of goods sold is:

Journal entry passed during the purchase of a fixed asset is:

When it is paid for purchasing the fixed assetFixed AssetFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.read more, then it will be added in the cost of the fixed asset and the entry to record this will be as follow:

Conclusion

Carriage inwards is an expense that is incurred while transporting goods from the supplier’s warehouse to the buyer’s warehouse. It can also be learned as costs about the shipping and handling of goods that are, in most cases, incurred by a company that is purchasing Goods from the supplier. It must be treated as a direct expense, and therefore, the same must be considered while calculating the total cost of the goods purchased. It must be included as a part of the cost of inventory, cost of available goods, and COGS (cost of goods soldCost Of Goods SoldThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more).

The capitalization of Freight inwards is dependent on the asset that is purchased. The buyer mostly takes care of the payment made towards it. However, it may not be the case for all, and sometimes, even the seller may pay the Freight inwards, or both the seller and the buyer may pay for the same.

This has been a guide to Carriage Inwards and its Meaning. Here we discuss Freight inwards examples and journal entries and differences from Carriage Outwards. You can learn more about financing from the following articles –

  • Quality of ConformanceReturn InwardFinished Goods Inventory FormulaCredit Sales Journal Entry