3.2 Carriage Inwards and Carriage Outwards

When a business buys goods from a supplier the cost of delivering or transporting the goods also has to be paid． In accountancy terms， this cost of transport is often referred to as‘ carriage’ ．

Carriage charges for transporting goods purchased into a business is known as carriage inwards ． When goods are purchased one supplier may include carriage within the purchase cost whilst another may charge separately for carriage． For example， suppose your business was buying exactly the same goods from two suppliers． One supplier might sell them for ￡ 100 and not charge anything for carriage． Another supplier might sell the goods for ￡ 95， but you would have to pay ￡ 5 to a courier for carriage inwards， i．e． a total cost of ￡ 100.In both cases， the same goods cost you the same total amount． It would not be appropriate to leave out the cost of carriage inwards from the ‘cheaper’ supplier in the calculation of gross profit， as the real cost to you having the goods available for resale is ￡ 100.When this happens the carriage inwards charge is always added to the cost of purchases in the trading account．

Carriage outwards is the cost of delivering the goods to the business's customers． It is an expense and not part of the selling price of the goods． Carriage outwards is always charged as an expense in the profit and loss account． It is never included in the calculation of gross profit．

Suppose that in the illustration shown in this chapter， the goods had been bought for the same total figure of ￡ 31，200 but， in fact， ￡ 29，200 was the figure for purchases and ￡ 2，000 for carriage inwards． The trial balance extract would appear as below in Exhibit 3.5.

Considering this carriage inwards， the trading account section of the statement of profit or loss would then be as shown in Exhibit 3.6.

3.3 The Second Year of a Business

Continuing with the example of G． John， at the end of his second year of trading， on 31 December 20×2， he draws up another trial balance （Exhibit 3.7）．

1.Adjustments Needed for Inventory

So far， we have been looking at new businesses only． When a business starts， it has no inventory brought forward． G． John started in business in 20×1.Therefore， when we were preparing John's statement of profit or loss for 20×1， there was only closing inventory to worry about．When we prepare the statement of profit or loss for the second year we can see the difference． If you look back to the statement of profit or loss in previous sections， you can see that there was closing inventory of ￡ 3，000.This is， therefore， the opening inventory figure for 20×2.We will need to incorporate it in the trading account． It is also the figure for inventory that you can see in the trial balance as at 31 December 20×2.

Remember：The closing inventory for one period is always brought forward as the opening inventory for the next period．

G．John checked his inventory at 31 December 20×2 and valued it at that date at ￡ 5，500.We can summarise the opening and closing inventory account positions for John over the two years as shown in Exhibit 3.8.

2.Ledger Accounting for Inventory

To enable you to understand the double entry aspect of inventory， both the inventory account and the trading account for G． John for the year ended 31 December 20×2 are shown below：

You can see that in 20×2 there is both a debit and a credit double entry made at the end of the period to the trading account． First， the inventory account is credited with the opening inventory amount of ￡ 3，000 and the trading account is debited with the same amount． The entries above show how this has been recorded using double entry：

Then， the inventory at 31 December 20×2 is ￡ 5，500 and had not been entered into the accounts previously． The entries above show how this has been recorded using double entry：

Thus， while the first year of trading only includes one inventory figure in the trading account， for the second year of trading both opening and closing inventory figures will be in the calculations． Let's now calculate the cost of goods sold for 20×2：

The gross profit can now be found by taking into consideration the effect the closing inventory has on the gross profit． Remember that sales less cost of goods sold equals gross profit，therefore：

Now the statement of profit or loss and the statement of financial position can be drawn up，as shown below in Exhibit 3.9 and Exhibit 3.10：

Financial statements is the term given to all the summary statements that accountants produce at the end of reporting periods． They are often called ‘ final accounts ’，but this term is quite misleading （as none of the financial statements are‘accounts’ in the accounting sense）．Nevertheless， some people do still refer to them as the ‘ final accounts’ or simply as the accounts of a business． You therefore， will， need to be aware of these terms， just in case you read something that uses these terms， or your teacher or lecturer， or an examiner， uses them at some time．

3.Other Expenses in the Trading Account

You already know that carriage inwards is added to the cost of purchases in the trading account． You also need to add to the cost of goods in the trading account any costs incurred in converting purchases into goods for resale． In the case of a trader， it is very unusual for any additional costs to be incurred getting the goods ready for sale．

For goods imported from abroad it is usual to find that the costs of import duty and insurance are treated as part of the cost of the goods， along with any costs incurred in repackaging the goods． Any such additional costs incurred in getting goods ready for sale are debited to the trading account．

Some of you often find it difficult to remember how to treat returns and carriage when preparing the statement of profit or loss． You need to be sure to learn and remember that all returns， inwards and outwards， and carriage inwards appear in the calculation of gross profit． All the costs of putting goods into a saleable condition should be charged to the trading account．Carriage outwards appears as an expense in the profit and loss account section of the statement of profit or loss．

Some students lose a lot of marks on the topics covered in this chapter because they assume that the topics are easy and unlikely to be things that they will forget． Unfortunately， they are fairly easy to understand， and that is why they are easily forgotten and confused． You would be wise to make sure that you have understood and learnt everything presented to you in this chapter before you go any further in the book．

Summary

·Returns inwards should be deducted from sales in the trading account．

·Returns outwards should be deducted from purchases in the trading account．

·Carriage inwards is shown as an expense item in the trading account．

·Carriage outwards is shown as an expense in the profit and loss account．

·Inventory account carries forward the balance from one period to the next．

·In the second and later years of a business， both opening and closing inventory are brought into the trading account．

·It is normal practice to show cost of goods sold as a separate figure in the trading account．

·A statement of profit or loss that includes the adjustments for carriage inwards and both opening and closing inventory in the trading section and carriage outwards as an expense in the profit and loss section．

·That expense items concerned with getting goods into a saleable condition are charged in the trading account．

·That where there is import duty or insurance charged on goods purchased， these costs are treated as part of the cost of goods sold． AidCchYFlr3Jtu0CRQrGjhvgLSFsE49zQg+qadlBg2bz/T4NVLe/13051v4riSgZ

Exercise

3.1 Which of the following would be a credit balance in the trial balance？ （ ）

A．Bank overdraft

B．Drawings

C．Purchases

D．Carriage outwards

3.2 A business has opening inventory of ￡ 7，200 and closing inventory of ￡ 8，100.Purchases for the year were ￡ 76，500， carriage inwards was ￡ 50 and carriage outwards was ￡ 180.The figure for cost of sales is（）．

A．￡ 75，550

B．￡ 75，650

C．￡ 75，830

D．￡ 77，450

3.3 Muse began trading on 1 January 20×8 and had zero inventories at that date． During 20×8 it made purchases of ￡ 455，000， incurred carriage inwards of ￡ 24，000， and carriage outwards of ￡ 29，000.Closing inventories at 31 December 20×8 were ￡ 52，000.

In the statement of profit or loss for the year ended 31 December 20×8， the cost of sales figure is（）．

A．￡ 456，000

B．￡ 427，000

C．￡ 432，000

D．￡ 531，000

3.4 Indicate whether the following statements （3.4 ＆3.5） are true or false．（）

A van for sale by a dealer is shown as a non-current asset in its statement of financial position．

A．True

B．False

3.5 Import duties may be included in the cost of inventory．（ ）

A．True

B．False

3.6 For the year ended 31 October 20×3 a company did a physical count of inventory on 4 November 20×3， leading to an inventory cost at this date of ￡ 483，700.

Between 1 November 20×3 and 4 November 20×3 the following transactions took place：

1 Goods costing ￡ 38，400 were received from suppliers．

2 Goods that had cost ￡ 14，800 were sold for ￡ 20，000.

3 A customer returned， in good condition， some goods which had been sold to him in October for ￡ 600 and which had cost ￡ 400.

4 The company returned goods that had cost ￡ 1，800 in October to the supplier， and received a credit note for them．

What figure should be shown in the company's financial statements at 31 October 20×3 for closing inventory， based on this information？ （）

A．￡ 458，700

B．￡ 505，900

C．￡ 508，700

D．￡ 461，500

3.7 The cost of inventory in the financial statements of Quebec Ltd for the year ended 31 December 20×4 of ￡ 836，200 was based on an inventory count on 4 January 20×5.Between 31 December 20×4 and 4 January 20×5， the following transactions took place：

What adjusted figure should be included in the financial statements for inventories at 31 December 20×4？（）

A．￡ 838，100

B．￡ 842，300

C．￡ 818，500

D．￡ 834，300

3.8 A statement of financial position is best described as（）．

A．A snapshot of the entity's financial position at a particular point in time

B．A record of an entity's financial performance over a period of time

C．A list of all the income and expenses of the entity at a particular point in time

D．A list of all the assets and liabilities of the entity over a period of time

3.9 Which of the following calculations could produce an acceptable figure for a trader's net profit for a period if no accounting records had been kept？ （）

A．Closing net assets plus drawings minus capital introduced minus opening net assets

B．Closing net assets minus drawings plus capital introduced minus opening net assets

C．Closing net assets minus drawings minus capital introduced minus opening net assets

D．Closing net assets plus drawings plus capital introduced minus opening net assets

3.10 A sole trader fixes his prices to achieve a gross profit percentage on sales revenue of 40％． All his sales are for cash． He suspects that one of his sales assistants is stealing cash from sales revenue． His trading account for the month of June 20×3 is as follows：

Assuming that the cost of sales figure is correct， how much cash could the sales assistant have taken？ （）

A．￡ 5，040

B．￡ 8，400

C．￡ 22，000

D．It is not possible to calculate a figure from this information

3.11 Aluki fixes prices to make a standard gross profit percentage on sales of 20％． The following information for the year ended 31 January 20×3 is available to compute her sales total for the year．

What is the sales figure for the year ended 31 January 20×3？（ ）

A．￡ 669，375

B．￡ 702，600

C．￡ 772，375

D．￡ 741，480

3.12 Wanda keeps no accounting records． The following information is available about her position and transactions for the year ended 31 December 20×4：

Based on this information， what was Wanda's profit for 20×4？（ ）

A．￡ 42，000

B．￡ 242，000

C．￡ 138，000

D．￡ 338，000

3.13 The following information is available for a sole trader who keeps no accounting records：

Using this information， what is the trader's profit for the year ended 30 June 20 × 5？（）

A．￡ 126，000

B．￡ 50，000

C．￡ 86，000

D．￡ 90，000

3.14 The following information is available about the transactions of Razil， a sole trader who does not keep proper accounting records：

Based on this information， what is Razil's sales revenue for the year？ （ ）

A．￡ 982，800

B．￡ 1，090，000

C．￡ 2，520，000

D．￡ 1，080，000

3.15 Prepare the statement of profit or loss for the year ended 31 July 20×1， in respect of T． Mann， from the following details in Exhibit 3.11：

3.16 From the following trial balance of G． Still （Exhibit 3.12）， draw up a statement of profit or loss for the year ending 30 September 20×7， and a statement of financial position as at that date．

Note ：Inventory at 30 September 20×7 was ￡ 44，780

3.17 From the following trial balance of S． Shah （Exhibit 3.13）， draw up a statement of profit and loss for the year ended 30 June 20×1 and statement of financial position as at that date．

Note ：Inventory at 30 June 20×1 was ￡ 28，320.

3.18 The following is the trial balance of T． Owen as at 31 March 20×6 （Exhibit 3.14）．Draw up a set of financial statements for the year ended 31 March 20×6.

Note ：Inventory at 31 March 20×6 was ￡ 58，440.

3.19*F． Brown drew up the following trial balance as at 30 September 20×5 （Exhibit 3.15）． You are to draft the statement of profit or loss for the year ending 30 September 20×5 and a statement of financial position as at that date．

Note ：Inventory at 30 September 20×5 was ￡ 89，404.

Reference

1.Alan Sangster，Frank Wood's Business Accounting Volume 1（2019）， Pearson．

2.Andrew Thomas and Anne Marie Ward． Introduction to Financial Accounting （2019），McGraw-Hill Education．

3.ACCA FA Financial Accounting／ FIA FFA Interactive Text 2020， BPP Learning Media．

4.ACCA FA Financial Accounting／ FIA FFA Practice ＆ Revision Kit 2020， BPP Learning Media．

5.Accounting （Study Manual 2020）， The Institute of Chartered Accountants in England and Wales．

6.Accounting （Question Bank 2020）， The Institute of Chartered Accountants in England and Wales． AidCchYFlr3Jtu0CRQrGjhvgLSFsE49zQg+qadlBg2bz/T4NVLe/13051v4riSgZ