In accounting, cartage refers to the expenses incurred for transporting goods, specifically encompassing costs related to freight, loading, and unloading. These expenditures are an integral part of operations involving the purchase or sale of various types of goods. This includes everything from raw materials and semi-finished products to consumable items and already finished goods intended for trading. Understanding cartage is crucial for accurate inventory valuation and precise profit calculation.
Understanding the Types of Cartage in Accounting
Cartage costs are primarily categorized based on whether they relate to goods purchased (inwards) or goods sold (outwards), which significantly impacts their accounting treatment and how they appear on a company's financial statements.
Cartage Inwards (Freight In)
Cartage inwards, often known as freight in, represents the transportation costs incurred by a business to bring purchased goods or raw materials into its premises or warehouse.
- Definition: These are the costs a company pays to get goods from a supplier to its own location.
- Accounting Treatment: Cartage inwards is considered a direct expense and is added to the cost of the inventory. This is because these costs are necessary to get the goods into a condition and location ready for sale or production.
- Impact on Financial Statements:
- Increases the cost of inventory on the balance sheet.
- Increases the cost of goods sold (COGS) when the inventory is eventually sold.
- Ultimately reduces the company's gross profit.
- Example: A clothing retailer orders a shipment of new apparel from a manufacturer. The cost to transport these clothes from the manufacturer's factory to the retailer's distribution center is cartage inwards. This cost is added to the purchase price of the apparel, becoming part of the inventory's total cost.
Cartage Outwards (Freight Out)
Cartage outwards, also referred to as freight out, represents the transportation costs incurred by a business to deliver goods to its customers.
- Definition: These are the costs a company pays to ship goods from its location to a customer's location.
- Accounting Treatment: Cartage outwards is generally treated as an indirect expense or an operating expense. It is recorded as a selling and distribution expense in the income statement. These costs are incurred after the goods are ready for sale and typically aimed at facilitating the sale or delivery.
- Impact on Financial Statements:
- Does not affect the cost of inventory or COGS.
- Reduces net profit, as it is an operating expense.
- Example: An e-commerce company sells a consumer electronic device to a customer. The cost of shipping the device from the company's warehouse to the customer's home is cartage outwards. This cost is expensed as a selling expense in the period it occurs.
Key Differences: Cartage Inwards vs. Cartage Outwards
Understanding the distinction between these two types of cartage is essential for accurate financial reporting and analysis.
| Feature | Cartage Inwards (Freight In) | Cartage Outwards (Freight Out) |
|---|---|---|
| Purpose | Bringing goods into the business for purchase or production | Delivering goods out of the business to customers after a sale |
| Cost Type | Direct expense; capitalized as part of inventory cost | Indirect expense / Operating expense |
| Financial Impact | Increases Inventory value; affects Cost of Goods Sold (COGS) | Affects Selling & Distribution Expenses; impacts Net Profit |
| Financial Statement | Part of inventory on the Balance Sheet; COGS on the Income Statement | Operating Expense on the Income Statement |
| Timing | Incurred during the acquisition of goods | Incurred during the sale or delivery of goods |
Importance in Financial Reporting
Accurately categorizing and accounting for cartage costs is vital for several reasons:
- Accurate Inventory Valuation: Correctly adding cartage inwards to inventory ensures that the inventory is valued at its true cost, adhering to accounting principles like the historical cost principle. This directly impacts the balance sheet and subsequent cost of goods sold calculations.
- Precise Gross Profit Calculation: Cartage inwards directly influences the cost of goods sold, thus affecting the gross profit reported by a company.
- Comprehensive Net Profit Analysis: Cartage outwards affects operating expenses, providing a clearer picture of the company's profitability after accounting for sales and distribution efforts.
- Informed Decision Making: Managers use this information to analyze the efficiency of their supply chain, negotiate better freight rates, and price their products appropriately to maintain profitability.
Practical Insights
- Many businesses utilize dedicated accounts for "Freight In" and "Freight Out" to meticulously track these expenses separately in their accounting systems.
- The specific shipping terms agreed upon (e.g., FOB Shipping Point vs. FOB Destination) between buyers and sellers determine who is responsible for paying and recording cartage costs.
- For businesses engaged in international trade, cartage forms a component of broader landed costs, which include customs duties, insurance, and other charges required to get goods to their final destination.
For further reading on this topic, you can explore resources like Investopedia's article on Freight In vs. Freight Out or AccountingCoach's explanation of Freight-In and Freight-Out.
