Freight On Board Understanding How FOB Works in Shipping

In an FOB shipping point agreement, ownership is transferred from the seller to the buyer once goods have been delivered to the point of origin. Once at this shipping point, the buyer is the owner of the goods and at risk during transit. As such, FOB shipping means that the supplier retains ownership and responsibility for the goods until they are loaded ‘on board’ a shipping vessel. Simply fob accounting put, an incoterm is the standard contract used to define responsibility and liability for the shipment of goods. It plainly lays out how far along into the process the supplier will ensure that your goods are moved and at what point the buyer takes over the shipment process. This becomes significant when you make out your financial statements for the quarter or any other period.

The buyer should record the purchase, the account payable, and the increase in its inventory as of December 30 (the date that the purchase took place). Since the goods on the truck belong to the buyer, the buyer should pay the shipping costs. In this case, the seller completes the sale in its records once the goods arrive at the receiving dock. In general, the accounting entries are often performed earlier for an FOB shipping point transaction than an FOB destination transaction. Shipping terms affect the buyer’s inventory cost because inventory costs include all costs to prepare the inventory for sale. This accounting treatment is important because adding costs to inventory means the buyer does not immediately expense the costs and this delay in recognizing the cost as an expense affects net income.

The qualifiers of FOB shipping point and destination are sometimes used to reduce or extend the responsibility of the supplier in an FOB shipping agreement. A buyer receiving goods FOB Destination might send them back to the seller if the shipment is badly damaged. If the goods are FOB Shipping Point, the buyer is legally responsible for any damage in transit. Some buyers prefer FOB Destination because that lets them make the call on how the goods should be shipped, protected from damage and insured. As the goods were sold FOB shipping point, the seller does not have to pay the freight cost. However, in this case the seller has prepaid the shipping cost on behalf of the buyer and is now owed 5,600.

  1. In this case, the seller completes the sale in its records once the goods arrive at the receiving dock.
  2. FOB shipping point, also known as FOB origin, indicates that the title and responsibility of goods transfer from the seller to the buyer when the goods are placed on a delivery vehicle.
  3. Free on board (FOB) shipping point and free on board (FOB) destination are two of several international commercial terms (Incoterms) published by the International Chamber of Commerce (ICC).
  4. CIF stands for Cost, Insurance and Freight, whereas FOB stands for Free on Board.

You cut $3,000 from accounts receivable and enter $3,000 in the bad debt expense account. If you know from experience that, say, 7 percent of your accounts receivable won’t be paid, you set up an “allowance for doubtful accounts” entry in your records. Subtracting 7 percent of accounts receivable on your financial statements gives you a more realistic view of how much income to expect. FOB is an acronym for Free on Board, and indicates whether the supplier or the customer will pay shipping expenses. Also, the type of FOB shows which party takes legal responsibility for the goods being shipped, and at what point during transport that responsibility is transferred.

What Does “FOB” Mean in Accounting?

For example, if a company was shipping its goods to New York City, it would be written out as FOB New York. It requires the supplier to pay for the delivery of your goods up until the named port of shipment, but not for getting the goods aboard the ship. In that case, the seller wouldn’t record the transaction in the ledger until the buyer pays them. If you’re a publicly traded company, generally accepted accounting principles (GAAP) require you use accrual accounting. Incoterms define the international shipping rules that delegate responsibility of buyers and sellers. For example, assume Company XYZ in the United States buys computers from a supplier in China and signs a FOB destination agreement.

Free on Board (FOB) Shipping Point

Assume that a seller quoted a price of $900 FOB shipping point and the seller loaded the goods onto a common carrier on December 30. Also assume that the goods are in transit until they arrive at the buyer’s location on January 2. On December 30, the seller should record a sale, an account receivable, and a reduction in its inventory.

Who Pays for Shipping in FOB Shipping Point?

What is FOB shipping, how does it differ from other incoterms, and when should you use it? The most common international trade terms are Incoterms, which the International Chamber of Commerce (ICC) publishes, but firms that ship goods within the U.S. must adhere to the Uniform Commercial Code (UCC). “FOB Destination” means the seller retains the title of the goods and all responsibility during transit until the items reach the buyer.

Transfer of Ownership

Under FOB destination, freight collect and allowed terms, the buyer pays for the freight costs, but deducts the cost from the supplier’s invoice. There are four variations on FOB destination terms, which are noted below. A free on board (FOB) designation specifies whether the buyer is responsible for freight charges. It determines the obligations of the parties when they’re trading goods. There are two main types of free on board freight with several sub-designations, including FOB destination and FOB shipping point. Buyers have more control over the transportation process, as the seller retains responsibility until the goods are delivered.