Carriage Outwards: Detailed Definition
Carriage outwards refers to the transportation costs a business incurs when it delivers goods to its customers. These delivery costs are considered a business expense and are written off in the profit and loss account for the period in which they occur. Carriage outwards is critical for businesses that deliver physical goods to their customers, as it directly impacts the cost of sales and profitability.
Examples of Carriage Outwards
- A Retail Business: A store that sells furniture might incur carriage outwards when they deliver purchased items to their customers’ homes.
- E-commerce Company: An online business that sells electronic gadgets incurs carriage outwards for shipping the products to the customers.
- Manufacturing Firm: A factory that produces custom machinery will incur carriage outwards when transporting completed machines to their clients.
Frequently Asked Questions (FAQs)
Q1: How is carriage outwards recorded in accounting books?
A1: Carriage outwards is recorded as an operating expense on the debit side of the profit and loss account.
Q2: Can carriage outwards be charged to the customer?
A2: Yes, a business can charge carriage outwards to the customer, either by including it in the product price or listing it as a separate shipping fee.
Q3: Is carriage outwards a direct or indirect cost?
A3: Carriage outwards is typically considered an indirect cost as it is not directly tied to the manufacturing of goods but rather to their distribution.
Q4: Does carriage outwards affect the cost of goods sold (COGS)?
A4: Carriage outwards does not directly affect COGS; instead, it is classified as a selling and distribution expense in the profit and loss account.
Q5: Difference between Carriage Inwards and Carriage Outwards?
A5: Carriage inwards refers to the cost of transporting goods into a business (e.g., from suppliers), while carriage outwards is the cost of delivering goods to customers.
- Carriage Inwards: The transportation cost paid to bring goods into the business from suppliers. It is a part of the cost of goods purchased.
- Delivery Expenses: General term for costs incurred in the transportation of goods to customers, encompassing carriage outwards.
- Selling and Distribution Expenses: Costs associated with getting the product from the business to the customer, including carriage outwards.
- Freight Out: Another term for carriage outwards, representing shipping charges borne by the seller.
Online References
- Investopedia – Carriage Expenses
- Accounting Dictionary – Carriage Outwards
- Corporate Finance Institute – Carriage Costs
Suggested Books for Further Studies
- “Financial Accounting” by Robert Libby, Patricia Libby, and Frank Hodge
- “Accounting Principles” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
Accounting Basics: “Carriage Outwards” Fundamentals Quiz
### Does carriage outwards refer to delivery costs incurred sending goods to customers?
- [x] Yes, it refers to delivery costs incurred sending goods to customers.
- [ ] No, it refers to delivery costs of goods received from suppliers.
- [ ] No, it refers to manufacturing costs.
- [ ] Yes, but only for international deliveries.
> **Explanation:** Carriage outwards pertains specifically to costs incurred in delivering goods to customers.
### Where is carriage outwards recorded in financial statements?
- [ ] As part of Cost of Goods Sold.
- [x] As an operating expense in the profit and loss account.
- [ ] On the balance sheet as an asset.
- [ ] As a contra-revenue item.
> **Explanation:** Carriage outwards is treated as an operating expense and is recorded in the profit and loss account.
### What type of cost is carriage outwards?
- [ ] A direct cost.
- [ ] A cost of goods sold.
- [x] An indirect cost.
- [ ] A capital expense.
> **Explanation:** Carriage outwards is an indirect cost as it pertains to product distribution rather than production.
### Can carriage outwards be passed onto the customer?
- [x] Yes, the company can charge the delivery fee to the customer.
- [ ] No, it must always be absorbed by the business.
- [ ] Yes, but only if explicitly mentioned in the contract.
- [ ] No, it needs to be expensed separately in financial records.
> **Explanation:** Carriage outwards can be included in the price charged to the customers or stated as a separate shipping fee.
### What is the difference between carriage outwards and freight out?
- [ ] Carriage outwards is for outgoing goods, while freight out is for incoming goods.
- [ ] There is no difference; they are the same.
- [ ] Freight out is an inventory cost; carriage outwards is not.
- [ ] Carriage outwards is used in the service industry, freight out in manufacturing.
> **Explanation:** The terms carriage outwards and freight out refer to the same concept of delivery costs incurred for sending goods to customers.
### Which section of the profit and loss account includes carriage outwards?
- [ ] Revenue
- [ ] Cost of Goods Sold
- [x] Selling and Distribution Expenses
- [ ] Administrative Expenses
> **Explanation:** Carriage outwards is included within the selling and distribution expenses section of the profit and loss account.
### Is it correct to say carriage outwards affects the cost of goods sold?
- [ ] Yes, it directly affects the cost of goods sold.
- [ ] Yes, it can be included as an inventory cost.
- [x] No, it does not directly affect the cost of goods sold.
- [ ] No, it reduces net profit immediately.
> **Explanation:** Carriage outwards does not directly affect the cost of goods sold; it's classified as a selling and distribution expense.
### How does recognizing carriage outwards impact the profit and loss account?
- [ ] Increases revenue.
- [ ] Reduces inventory cost.
- [x] Reduces net profit.
- [ ] Creates contingent liability.
> **Explanation:** Recognizing carriage outwards as an expense reduces the net profit for the period.
### Which accounting principle necessitates the recording of carriage outwards?
- [ ] Consistency Principle
- [ ] Objectivity Principle
- [ ] Historical Cost Principle
- [x] Matching Principle
> **Explanation:** The matching principle requires that expenses be matched with revenues, hence carriage outwards are expensed in the period they occur.
### Can carriage outwards be part of capital expenditures?
- [ ] Yes, if goods involve fixed assets.
- [ ] No, it is always an operational expense.
- [x] Typically, no, as it pertains to current year expenses.
- [ ] Yes, it can vary by standardized accounting practices.
> **Explanation:** Carriage outwards is viewed as an operational expense and typically does not form part of capital expenditures.
Thank you for exploring the intricacies of “Carriage Outwards” with our comprehensive guide and quizzes. Utilize these resources to deepen your accounting knowledge!
