Free on Board FOB Explained: Who’s Liable for What in Shipping?

If the goods are sent FOB Origin Freight Prepaid, the buyer accepts the goods when they leave the seller’s dock, but the seller still pays the freight charges. The term FOB shipping point is a contraction of the term Free on Board Shipping Point. It means that the customer takes delivery of goods being shipped to it by a supplier once the goods leave the supplier’s shipping dock. Since the customer takes ownership at the point of departure from the supplier’s shipping dock, the supplier should record a sale at that point.

When the shipment arrives at the origin, the buyer needs to attain responsibility for them. Even if the seller pays the shipping charges initially, they may charge the customer later. The company will assume responsibility for the office supplies even as they are yet to receive possession of the goods.

Free on Board Shipping Point

When they settle the bill, they erase the amount in accounts payable and reduce the amount in their cash account. From an accountant’s viewpoint, FOB matters because it determines when you record the sale. For example, suppose the contract for a $200,000 shipment of jewelry sets the terms as FOB Origin.

The transfer of title is the element of revenue that determines who owns the goods and the applicable value. The buyer pays for the freight costs, but deducts the cost from the supplier’s invoice. The buyer pays the freight charges at time of receipt, though the supplier still owns the goods while they are in transit. There are four variations on FOB destination terms, which are noted below. The term is used to designate ownership between the buyer and seller as goods are transported. If the goods are damaged in transit, the loss is the responsibility of the buyer.

Meaning of FOB

Incoterms define the international shipping rules that delegate responsibility of buyers and sellers. In FOB agreements, the responsibility for shipping transfer to the buyer as soon as the goods leave the seller’s location under FOB Shipping Point. Or, the responsibility can transfer to the buyer once he or she receives the goods if there is a FOB Destination agreement in place.

CIF (Cost, Insurance, and Freight) is another shipping agreement similar to FOB. Businesses use it when there are transactions across international borders. The primary difference between the two is the ownership of the shipment when it is in transit. 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. Having decided that the terms of the contract are FOB, it is now necessary to choose the point at which responsibility passes from the seller to the buyer.

What is FOB?

It’s a good idea to use a CIF contract when buyers deal with international suppliers, especially when sellers have easy and direct access to shipping vessels. CIF agreements cut down the need for buyers to take care of logistics in areas where they may not have experience, so all they need to do is simply take possession of the shipment once it arrives. Keep in mind, though, that CIF agreements are normally much more expensive than others.

• One of the world’s biggest importers of wheat, Egypt last year started shifting towards direct purchases instead of tenders after the war in Ukraine disrupted its buying.
• Still, understanding the basics can help your business manage its sending more efficiently.
• “FOB Destination” means the seller retains the title of the goods and all responsibility during transit until the items reach the buyer.
• Freight on Board (FOB), also referred to as Free on Board, is an international commercial law term published by the International Chamber of Commerce (ICC).

Due to constraints to an information system or delays in communication, it is more realistic that there is a slight timing difference between the legal arrangement and the accounting arrangement. For FOB destination, the seller retains ownership of the goods and is responsible for replacing damaged or lost items until the point where the goods have reached their final destination. Free on board destination makes the seller responsible until the freight arrives, including covering the cost of lost or damaged freight. As the goods were sold FOB shipping point, the seller does not have to pay the freight cost and is now owed the 5,000 for the goods. Knowing which arrangement is in place can help your business plan and budget for sending costs more effectively. In other words, carriage costs are the buyer’s responsibility with FOB and the seller’s responsibility with CIF.

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This becomes of interest to companies during the transportation of goods from one company to another. There are commonly two types of fob revenue recognition and liability, fob total cost in economics destination and fob shipping. The seller needs to pay for the transportation costs till the point of origin, where the buyer assumes the responsibility for the shipment.

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• In reality, the shipper will probably record a sale as soon as merchandise leaves its shipping dock, irrespective of the terms of delivery.
• It may be difficult to record delivery precisely when the goods have arrived at the shipping point.
• When it comes to the FOB shipping point option, the seller assumes the transport costs and fees until the goods reach the port of origin.
• Purchase orders, contracts, and other sending documents specify FOB terms between buyers and sellers.

From that point, buyers need to bear all the expenses for further transport. It is the primary transportation point where the company will assume responsibility for the office stationery they have ordered. The sale record will only happen when the supplier hands https://online-accounting.net/ over the supplies for transportation at the FOB shipping point. The official accounts entry will reduce the inventory balance and add a new item to accounts receivable. FOB (free on board) shipping point is a term used in the shipping of goods and services.

Example of FOB Shipping

He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. For new importers, going CIF or FOB Destination often makes excellent sense. If they don’t have the resources or expertise to arrange shipping and insurance, it’s easier to let the seller handle all those details. The seller will probably charge them more than for FOB Shipping Point, however.

Buyers are able to sign with the shipper of their choice and take as much coverage as they see fit to insure their shipments. Freight or free on board shipping point means that a company is allowing the purchaser or customer to assume the responsibility as soon as the goods have left the seller’s warehouse or business location. The seller is then allowed to recognize revenue as soon as the goods leave because the payment for these goods is certain as they leave the location.

If the terms include “FOB origin, freight prepaid,” the buyer assumes the responsibility for goods at the point of origin, but the seller pays the cost of shipping. FOB freight prepaid and added specifies that the seller is obligated to pay the freight transportation charges. The seller assumes the risk of loss of or damage to goods during transportation because the seller owns the goods during transit. The accounting systems of companies get impacted based on the time the buyer assumes responsibility for the shipment. While the shipping costs also get determined only after the transfer of ownership, it also affects inventory and accounting records. The seller can record a sale as soon as they ship the goods to their loading dock.