How to record carriage inwards and outwards

Step by step

1. Identify the direction. Decide whether the cost is for goods coming in or goods going out to customers.
2. Add carriage inwards to cost of sales. Include carriage inwards in the trading section, as part of the cost of goods bought.
3. Treat carriage outwards as an expense. Show carriage outwards among the expenses lower down the income statement.
4. Never mix the two. Keep them in different places, because they affect gross profit differently.
5. Check the effect. Carriage inwards reduces gross profit. Carriage outwards reduces profit for the year only.

Worked example

Carriage inwards of RM300 is added to purchases. Carriage outwards of RM200 is listed with the expenses.

Understanding the method

The word carriage covers two different costs. The direction of the goods decides the treatment.

Carriage inwards brings purchased goods into the business. Carriage outwards sends sold goods to customers.

The cost of an asset includes everything needed to bring it to the place and condition where it can be sold. So getting goods to your premises is part of their cost.

Delivering to a customer happens after the goods are ready for sale. It is a selling and distribution expense.

This is why they sit in different parts of the income statement. Carriage inwards is added to purchases in the trading section, so it raises the cost of sales and lowers gross profit. Carriage outwards is deducted below gross profit with the other expenses.

A simple test: does this cost make the goods ready to sell, or does it move goods that are already sold? The first goes in the trading section. The second goes in expenses.

Exam wording varies. Freight on goods bought, delivery charges on purchases and import handling on incoming stock all mean carriage inwards.

Delivery to customers, distribution costs on sales and the cost of despatching goods sold all mean carriage outwards. A trial balance may simply list two carriage figures, and you decide from a note or the context which is which.

Here is an example. Opening inventory is RM4,000, purchases RM26,000, carriage inwards RM1,200, closing inventory RM3,500, sales RM40,000 and carriage outwards RM900. Purchases plus carriage inwards are 26,000 + 1,200 = RM27,200.

Add opening inventory to get RM31,200 of goods available. Deduct closing inventory to get cost of sales of RM27,700. Gross profit is 40,000 − 27,700 = RM12,300.

Only then does carriage outwards appear. Deduct RM900, along with the other expenses, from the gross profit of RM12,300 to reach the profit for the year.

To check, everything above the gross profit line should relate to buying and holding stock. Everything below it should relate to selling and administration.

If carriage outwards was put in the trading account, gross profit is too low. If carriage inwards was put in expenses, gross profit is too high.

Common mistakes: adding carriage inwards to sales instead of purchases, and deducting carriage outwards from sales as though it reduced revenue. It is an expense and is listed separately.

If you keep placing carriage on the wrong side of gross profit, we can help. One of our teachers can show you the one-question test and check it against a full income statement with you. Book a trial class

Related skills

• How to calculate cost of sales
• How to prepare an income statement for a sole trader
• How to prepare a purchases day book

The methods here are standard accounting practice, with original figures. For your exam board's exact requirements, see exam boards and Sources.