Willow Corner Store pays $60 to have a delivery of rice brought in from the wholesaler, and a further $45 to have a bulk order taken out to a customer's add...
Question 1 Report
Willow Corner Store pays $60 to have a delivery of rice brought in from the wholesaler, and a further $45 to have a bulk order taken out to a customer's address. The bookkeeper posts the two amounts separately. Which classification applies to the two amounts?
Answer Details
Carriage is the cost of transporting goods, and it is classified by the direction in which the goods travel. Carriage inwards is the cost of bringing purchased goods into the business; carriage outwards is the cost of delivering goods to customers.
The $60 paid to have rice brought in from the wholesaler moves goods towards the shop, so it is carriage inwards. The $45 paid to take a bulk order out to a customer's address moves goods away from the shop, so it is carriage outwards. The correct classification is $60 carriage inwards and $45 carriage outwards.
The distinction matters because the two are treated differently in the income statement. Carriage inwards is added to purchases in the cost of sales calculation, because it is part of the cost of getting the inventory into a saleable condition, so it reduces gross profit. Carriage outwards is a selling and distribution expense charged below gross profit, so it reduces only the profit for the year. Swapping the two, or treating both the same way, leaves the profit for the year unchanged but reports the wrong gross profit and therefore the wrong gross profit margin.
A reliable check in the examination: ask whether the goods were coming in or going out, not who paid the carrier.
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