As a rule of thumb, the terms agreed to in FOB shipping must be clearly stated and followed in proper purchase order to prevent any conflicts. FOB abbreviation stands for “Free on Board,” and shipping point refers to the location, where the goods are loaded onto the carrier. The buyer records the purchase, accounts payable, and the increase in inventory on January 2 when the buyer becomes the owner of the goods. ‘FOB Destination, Freight Prepaid’ is the opposite of ‘FOB Destination, Freight Collect’ and is used to indicate that the seller assumes the cost of freight. It’s important for the moment of sale to be accurately recorded for this reason, and also for entry into the company records. Now that we’ve cleared that up, it’s time to set sail and ensure we’re all on the same page regarding the FOB shipping point.
It is much easier to determine when title transfers by referring to the agreed upon terms and conditions of the transaction; typically, title passes with risk of loss. The transfer of title may occur at a different time (or event) than the FOB shipping term. The transfer of title is the element of revenue that determines who owns the goods and the applicable value. As with all Incoterms, FOB does not define the point at which ownership of the goods is transferred. Before negotiating, make sure you understand the consequences of using FOB shipping point or FOB destination for your purchase—in terms of costs, risks, and responsibilities.
FOB Shipping Point vs. FOB Destination
With this option, the seller assumes more risk and responsibility, which can provide buyers with peace of mind. Additionally, FOB Destination can be a good option if the buyer is located far from fob shipping point the seller or if the goods are fragile and require special handling. On the other hand, the seller is responsible for the shipping costs from the point of origin to the FOB warehouse destination.
- On the other hand, if the contract specifies FOB Destination, the seller may be responsible for filing the claim.
- This may result in higher prices for the buyer, as the seller may need to factor in these additional costs when setting their prices.
- FOB terms like FOB Origin and FOB Destination help define ownership, risk, and transportation costs for both buyers and sellers.
- Just enter the dimensions and weight of your goods and specify the port of shipment, and you’ll get your FOB price calculation instantly.
- It may be difficult to record delivery precisely when the goods have arrived at the shipping point.
- Assume the computers were never delivered to Company XYZ’s destination, for whatever reason.
Remember to calculate those costs before counting your doubloons if you’re the seller. The FOB shipping point means the buyer assumes ownership and responsibility for the goods when they leave the seller’s designated shipping point. Think of it as a relay race – the baton (in this case, the goods) are passed off to the buyer as soon as they leave the seller’s hands. This means that your shipment is in the proverbial hands of the supplier through the process of transporting them to a port and loading them aboard a ship.
Key differences between FOB Shipping Point and FOB Destination
FOB is an acronym that means “free on board,” so FOB destination means free on board destination. This places full responsibility on the buyer for the goods while they are in transit. For FOB destination contracts, the shipper, who is also usually the seller, will remain liable until the goods physically reach the buyer. An FOB, or free on board, shipping point, is a record that explains where merchandise for a shipment is going and when it was shipped.
Only when the purchase arrives in perfect condition does the buyer accept it and consider the sale officially complete. When goods are labeled with a destination port, the seller stays responsible for damages, lost items, and other costs and issues until the shipment is complete. When goods are labeled as FOB shipping point, the seller’s role in the transaction is complete when the purchased items are given to a shipping carrier and the shipment begins.
FOB shipping point: key finding & main aspects to remember
From a practical perspective, recognition of receipt is instead completed at the receiving dock of the buyer. Thus, the sale is recorded when the shipment leaves the seller’s facility, and the receipt is recorded when it arrives at the buyer’s facility. This means there is a difference between the legal terms of the arrangement and the typical accounting for it.
This is the point of primary transportation in which the buyer will now assume responsibility for the treadmills. The equipment manufacturer would not record a sale until delivery to the shipping point; it is at this point the manufacturer would record an entry for accounts receivable and reduce its inventory balance. 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. Though in line with the accounting treatment mentioned above, it is worth explicitly calling out that FOB shipping point and FOB destination transfer ownership at different times. 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.