Carriage inwards refers to the transportation costs incurred by a business when purchasing goods from suppliers. These costs are directly related to bringing inventory or raw materials to the business premises and are considered part of the cost of goods purchased. Properly accounting for carriage inwards in ledger accounting ensures that the total cost of inventory is accurately reflected, which in turn affects the cost of goods sold and overall profitability.
1. What Is Carriage Inwards?
Carriage inwards represents the freight or transportation charges paid by a business to receive goods from suppliers. Unlike carriage outwards, which is a selling expense, carriage inwards is added to the cost of inventory and forms part of the cost of goods sold (COGS).
Key Characteristics of Carriage Inwards:
- Direct Cost: Carriage inwards is treated as a direct cost because it contributes to bringing goods to their intended location.
- Included in Inventory Cost: It is capitalized as part of the inventory value until the goods are sold.
- Affects Cost of Goods Sold: When goods are sold, carriage inwards is included in the COGS calculation, reducing gross profit.
2. Accounting Treatment of Carriage Inwards
Carriage inwards is recorded in the ledger by debiting the Carriage Inwards account (or including it in the Purchases account) and crediting the Cash or Accounts Payable account, depending on whether the payment was made immediately or on credit.
Journal Entry for Carriage Inwards:
Debit: Carriage Inwards (or Purchases)
Credit: Cash/Accounts Payable
3. Example of Carriage Inwards in Ledger Accounting
Scenario:
XYZ Company purchases goods worth $5,000 from a supplier. The supplier charges an additional $300 for delivery (carriage inwards). The total amount due is $5,300. The goods are purchased on credit.
Journal Entry for Carriage Inwards:
Debit: Purchases $5,000
Debit: Carriage Inwards $300
Credit: Accounts Payable $5,300
4. Ledger Entries for Carriage Inwards
A. Carriage Inwards Ledger
| Date | Description | Debit (Dr.) | Credit (Cr.) | Balance |
|---|---|---|---|---|
| Jan 5 | Carriage on Goods Purchased from Supplier | $300 | $300 Dr. |
B. Purchases Ledger
| Date | Description | Debit (Dr.) | Credit (Cr.) | Balance |
|---|---|---|---|---|
| Jan 5 | Goods Purchased from Supplier | $5,000 | $5,000 Dr. |
C. Accounts Payable Ledger
| Date | Description | Debit (Dr.) | Credit (Cr.) | Balance |
|---|---|---|---|---|
| Jan 5 | Goods and Carriage from Supplier | $5,300 | $5,300 Cr. |
5. Impact of Carriage Inwards on Financial Statements
- Income Statement: Carriage inwards is added to the cost of purchases and included in the Cost of Goods Sold (COGS). It reduces the gross profit when goods are sold.
- Balance Sheet: Until the goods are sold, carriage inwards is included in the value of inventory under Current Assets.
Example: Income Statement Impact
| Particulars | Amount |
|---|---|
| Sales Revenue | $8,000 |
| Less: Cost of Goods Sold (Including Carriage Inwards) | ($5,300) |
| Gross Profit | $2,700 |
6. Managing Carriage Inwards in Ledger Accounting
Properly accounting for carriage inwards ensures that the total cost of acquiring goods is accurately reflected in the financial statements. It is treated as a direct cost, impacting the Cost of Goods Sold (COGS) and ultimately influencing the gross profit of the business. By maintaining clear and accurate ledger entries, businesses can ensure compliance with accounting standards and make informed decisions regarding inventory and cost management.