Carriage outward, also known as freight-out or shipping costs, refers to the cost of transporting goods from a seller’s premises to the buyer’s location. In accounting and finance, carriage outward is considered as a selling expense since it is incurred by the seller when delivering goods to customers.
Importance of carriage outward:
- Impact on pricing: Carriage outward affects the overall price of the goods sold, as it is a cost incurred by the seller. Sellers may choose to pass this cost onto the buyer, absorb it, or split it with the buyer.
- Financial reporting: Proper accounting of carriage outward expenses is crucial for accurate financial reporting, ensuring that selling expenses are accurately recorded in the income statement.
Types of carriage outward:
- Per order: A fixed shipping fee charged for each order regardless of the number of items or weight.
- Per item: A shipping fee charged based on the number of items in an order.
- Weight-based: A shipping fee calculated based on the total weight of the items in an order.
- Distance-based: A shipping fee determined by the distance between the seller’s location and the buyer’s destination.
Formula for carriage outward: Carriage outward expenses are usually calculated using a formula specific to the chosen shipping method. For instance, if the seller charges a flat fee per order, the carriage outward expense would simply be that flat fee multiplied by the number of orders shipped during the accounting period.
Examples of carriage outward:
- A company selling furniture online charges a flat fee of $50 for shipping each item. If they sell 100 items in a month, the carriage outward expense for that month would be $5,000 (100 items x $50).
- An e-commerce retailer charges shipping based on weight. They ship 200 orders in a month with a total combined weight of 3,000 pounds, and their shipping rate is $1 per pound. The carriage outward expense for that month would be $3,000 (3,000 pounds x $1).
Issues and limitations of carriage outward:
- Difficult to estimate: The cost of carriage outward can be challenging to predict, especially for businesses with fluctuating shipping volumes and varying shipping distances.
- Impact on competitiveness: High carriage outward costs can make a seller’s products less competitive, as buyers may choose to purchase from sellers offering lower shipping costs.
- Inefficient allocation: Allocating carriage outward costs to products can be complicated, especially when shipping multiple items with different weights, sizes, and values.
Carriage outward is debit or credit: In accounting, carriage outward is recorded as a debit in the “Carriage Outward” or “Freight-Out” account and a credit in the “Cash” or “Accounts Payable” account. This is because it is an expense incurred by the seller, reducing the company’s net income and cash or increasing accounts payable.