FOB Shipping Point vs FOB Destination Know the

fob shipping point example

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. 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). That also means that if a pallet of jewelry is lost or damaged in shipment, the buyer must file any claims for reimbursement – not the seller – since the shipment became the buyer’s responsibility immediately. In this journal entry, the purchases account is a temporary account that will be cleared at the end of the period when we calculate the cost of goods sold. Likewise, we record this to the purchases account only when the buyer uses the periodic inventory system. In this journal entry, the freight out account is an expense account that is charged to the income statement during the period.

fob shipping point example

The International Chamber of Commerce (ICC) published these incoterms in order to standardize various responsibilities of concerned parties across the globe. FOB destination point refers to a product sold to a customer after it arrives at the buyer’s destination. In contrast to the FOB shipping point, the seller may bear the risk of loss and responsibility for transportation expenses while the goods are in transit. Cost, Insurance, and Freight (CIF) is an Incoterm where the seller is responsible for arranging the shipping and paying for the insurance of the goods. However, the CIF incoterm places a little more responsibility on the buyer’s side as it requires them to arrange the shipment to the destination port and pay any relevant charges there. In other words, when a seller specifies FOB shipping point, it means, that the buyer takes the ownership and responsibility for the goods once they leave the shipping point.

Freight on Board (FOB)

FOB is an international trade term created by the International Chamber of Commerce (ICC) in 1936. FOB stands for Free on Board, and it dictates where the responsibilities are split between the buyer and seller during the shipping process of international transactions. 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).

fob shipping point example

Furthermore, the buyer can select one freight forwarder for the entire shipment. This allows them to rely upon one single company for the whole of the delivery process and mitigates any potential miscommunications between separate shipping companies. With shipping being the final step in completing a sale, it is often the last thing thought about by both buyers and sellers.

Different terms Mean Different Accounting

FOB conditions may affect inventory, shipping, and insurance expenses, regardless of whether the transfer of products happens domestically or internationally. However, the seller must still arrange and pay for export permits and the transit from the origin point (warehouse) to the shipping vessel. FOB is advantageous for the buyer because it provides more flexibility and control over the logistics and shipping costs as they can choose their own shipping methods. Additionally, FOB lowers the buyer’s dependence on the seller if something goes wrong during the delivery as they have direct contact with the logistics company.

The buyer is responsible for everything else necessary to get the goods to the final destination. Since the package was shipped using shipping point, the title of the goods transferred when GM placed the package on the loading dock. On the other hand, the accounting rules are different when operating under FOB destination. Here, neither the buyer nor the seller can claim the difference in inventory until the goods have reached their final destination. Here, we will look at the difference between Free Onboard (FOB) shipping point and free onboard destination as they are vital incoterms for shippers and important to understand.

Disadvantages of FOB

If a shipment is sent FOB Shipping Point (the seller’s warehouse), then the sale is concluded as soon as the truck pulls out of the seller’s loading dock and is noted in the accounting system as such. The determination of who will be charged the freight costs is usually indicated in the terms of sale. If the Freight On Board is indicated as “FOB delivered,” the seller or shipper will be wholly responsible for all the costs involved in transporting the consignment. Where the FOB terms of sale are indicated as “FOB Origin,” the buyer is responsible for the costs involved in transporting the goods from the seller’s warehouse to the final destination.

All the responsibilities and risks related to the delivery of goods are also transferred to the buyer at this point. FOB destination stands for “Free on Board Destination.” FOB is one of the commonly used shipping terms, which means that the legal title to the goods remains with the Supplier until the goods reach the buyer’s location. The FOB destination is the location where the ownership changes hand from the seller to the buyer, and thus the actual sale of goods occurs. This is important for the accounts, as it dictates the period when the amounts need to be entered into the records. Simply 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.

Free on Board is an Incoterm that evenly splits the responsibilities between buyers and sellers. Sellers are not held responsible for any in-transit loss once the goods are on board. Finally, the seller is typically knowledgeable on all export documents required in their own country, making the process fairly straightforward for them. Additionally, FOB should not be used for containerised cargo because it becomes impossible to pinpoint when any potential damage occurs, making it difficult to determine who is liable between the buyer and seller. FOB is most widely used to import products from Asia to the UK and is best used when a buyer uses a China Freight Forwarder to organise the shipments as it offers a low unit pricing for the cargo. In the FOB Incoterm rules, it is essential to note that insurance is not obligated to the buyer or seller.

This also allows them to build a relationship with a freight forwarder to make the delivery process smooth, with less dependence on the seller. Free Carrier Agreement (FCA) provides a similar split of responsibilities between buyers and sellers. In FCA, the buyer is also responsible for any charges that occur at the origin port, such as pre-carriage inspections. Additionally, the buyer doesn’t have the opportunity for the delivery to be made to its final destination. Instead, the goods arrive at their destination port, and the buyer must arrange any onward carriage to the warehouse.

In Accounting

If the same seller issued a price quote of «$5000 FOB Miami», then the seller would cover shipping to the buyer’s location. The phrase passing the ship’s rail is no longer in use, having been dropped from the FOB Incoterm in the 2010 revision. When the ship’s rail serves no practical purpose, such as in the law firm bookkeeping case of roll-on/roll-off or container traffic, the FCA term is more appropriate to use. Only the most enthusiastic lawyer could watch with satisfaction the spectacle of liabilities shifting uneasily as the cargo sways at the end of a derrick across a notional perpendicular projecting from the ship’s rail.

  • It is understood that the buyer is liable for the package the moment it leaves the FOB location (seller’s location) and gets shipped to the FOB address (buyer’s address).
  • After the title is transferred, the seller’s responsibility ends, and it falls to the buyer to ensure their goods reach their final destination promptly and in sound condition.
  • Likewise, the debit of the inventory in the this journal entry represents the increase of the inventory balance when the buyer receives the goods from the seller.
  • This means there is a difference between the legal terms of the arrangement and the typical accounting for it.

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