Why carriage inwards and outwards are treated differently

Carriage is the cost of transporting goods. It seems odd that accounting treats it in two ways depending on which direction the goods travel.

Carriage inwards and carriage outwards are both delivery charges. Yet one is included in the cost of goods and the other sits among the expenses further down.

This is not a fussy rule invented to catch students out. There is a clear reason, and it explains why the gross profit figure changes.

What the two terms mean

Carriage inwards is the cost of getting goods into the business: the delivery charge paid to have purchases brought to its premises. Carriage outwards is the cost of getting goods out to customers: the delivery charge paid to send goods it has sold.

The words describe direction. Inwards is goods coming in as purchases.

Outwards is goods going out as sales. Both are amounts paid to a carrier, but they belong to opposite ends of the trading process.

The principle that separates them

Costs should sit with the activity they relate to. Carriage inwards relates to buying goods, so it belongs with the cost of those goods. Carriage outwards relates to selling and distributing goods, so it belongs with the selling expenses.

Getting inventory onto the shelves is part of acquiring it. Getting sold goods to the customer is part of the selling operation that comes after the profit on the goods has been earned.

Why carriage inwards is part of the cost of buying

The true cost of having goods ready to sell is not just the supplier’s invoice price. It includes the cost of bringing them in. If a business buys inventory for RM5,000 and pays RM300 to have it delivered, the goods really cost RM5,300.

The delivery charge is part of getting the goods into a saleable position. So carriage inwards is added to purchases in the trading section of the income statement and becomes part of cost of sales. This follows the same logic that values inventory at all the costs needed to bring it to its present location and condition.

Why carriage outwards is a selling expense

By the time a business delivers goods to a customer, the sale has been made and the profit on those goods is already decided. The delivery cost is a cost of running the selling side, a service provided to customers, and not a cost of acquiring inventory.

It sits with other expenses such as advertising and wages, below gross profit in the income statement. It is an expense of doing business, not a cost of the goods.

How this affects gross profit

Gross profit is sales less cost of sales. Carriage inwards is part of cost of sales, so it reduces gross profit.

Carriage outwards sits below gross profit among the expenses, so it does not affect gross profit. It only reduces the profit for the year. Two delivery charges of the same size can have different effects on the accounts.

A business studying its gross profit margin is looking at how profitably it buys and sells goods. Carriage inwards belongs in that picture because it is part of what the goods cost. Carriage outwards does not, because it is about distribution.

A worked contrast

A business has sales of RM40,000 and buys goods costing RM22,000. It pays RM1,000 carriage inwards and RM800 carriage outwards. To keep it simple, assume there is no opening or closing inventory.

Cost of sales is RM22,000 + RM1,000 = RM23,000. Gross profit is RM40,000 - RM23,000 = RM17,000.

The RM800 of carriage outwards never enters that calculation. It appears lower down as an expense, reducing the profit for the year and leaving gross profit unchanged.

If the two figures were put in the wrong places, both gross profit and profit for the year would be misstated. Total costs would stay the same.

Why the split protects meaningful figures

Gross profit should show how much a business makes from buying goods and selling them for more. For that to mean anything, it must include everything that makes up the cost of the goods, and carriage inwards is one of those things.

It must also exclude costs of running the business, such as delivering to customers. Mixing those in would blur what gross profit measures. The split protects the usefulness of both gross profit and the expenses total.

Reading the accounts with this in mind

Carriage inwards in the trading section tells you the business has counted the cost of bringing goods in as part of their cost, as it should. Carriage outwards among the expenses tells you the cost of distributing sold goods is kept separate from the trading result. Someone comparing gross profit margins across two years can then trust they are comparing like with like.

The two carriages are a small topic, but they teach a large idea. Costs are classified by the activity they support, and where a cost sits changes the story the accounts tell.

If carriage still causes confusion, one of our teachers can explain the reasoning behind each placement, with worked trading account figures, in a one-to-one session. Book a trial class

Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 6.2 Interpretation of accounting ratios (page 18).