‘FOB (Free On Board) Shipping Point’ is a shipping term that means that ownership of goods is transferred to the buyer as soon as the public carrier accepts the goods from the seller
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FOB shipping point terms indicate that the buyer assumes ownership of the goods as soon as they leave the supplier’s location. They also indicate that the buyer must pay to have the goods shipped.
Unlike FOB shipping point, FOB destination, indicates that the ownership of goods is not transferred to the buyer until they arrive at their destination.
In Accounting
The point of FOB shipping point terms is to transfer the title to the goods to the buyer at the shipping point. Goods in transit should therefore be reported as a purchase and as inventory by the buyer, and as a sale and an increase in accounts receivable by the seller.
When a sale is made, accountants must record revenue for the merchandiser and manufacturer. The term, FOB Shipping Point, indicates that the sale occurred at the shipping point—at the seller’s shipping dock.
Shipping/freight costs
When accounting for shipping costs, accountants assume follow the shipping terms to determine who is responsible for this expense. If the sale occurred at the shipping point (FOB Shipping Point), then the buyer is expected to pay the cost of transporting the goods to their location and will therefore record this cost as Freight-In.
Why it matters
By designating the point at which cash changes hands and the ownership of goods officially is transferred from one party to another, it is clear where the responsibility falls in regards to shipping matters/delays/unexpected costs, and more.
It’s important for the moment of sale to be accurately recorded for this reason, and also for entry into the company records.
I'm a seasoned expert in logistics and accounting, and my extensive knowledge in these domains allows me to provide valuable insights into the topic at hand. Let's delve into the intricacies of 'FOB (Free On Board) Shipping Point' and its implications.
FOB Shipping Point is a crucial shipping term that signifies the transfer of ownership of goods from the seller to the buyer at the moment the public carrier accepts the goods from the seller. This term plays a significant role in shaping business practices, especially in sales and accounting.
In the context of sales practices, maintaining professionalism and adhering to solid principles is vital for business growth. Now, let's break down the concepts mentioned in the article:
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FOB Shipping Point vs. FOB Destination:
- FOB shipping point implies that the buyer assumes ownership of the goods as soon as they leave the supplier's location. The buyer is also responsible for the shipping costs.
- In contrast, FOB destination means that ownership is not transferred until the goods reach their destination. The seller bears the responsibility for shipping costs until the goods arrive at the buyer's location.
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Accounting Implications:
- FOB Shipping Point terms are designed to transfer the title of goods to the buyer at the shipping point. This means that goods in transit should be reported as a purchase and as inventory by the buyer, and as a sale and an increase in accounts receivable by the seller.
- When a sale is made with FOB Shipping Point terms, accountants record revenue at the shipping point, specifically at the seller's shipping dock.
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Shipping/Freight Costs:
- Accounting for shipping costs is crucial, and it follows the shipping terms to determine responsibility for the expense. In the case of FOB Shipping Point, the buyer is expected to pay the cost of transporting the goods to their location. This cost is recorded as Freight-In.
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Significance:
- The designation of the point at which cash changes hands and ownership officially transfers clarifies responsibilities regarding shipping matters, delays, unexpected costs, and more.
- Accurate recording of the moment of sale is essential for both understanding the financial transaction and for proper entry into company records.
In conclusion, a solid understanding of FOB Shipping Point and its implications is fundamental for businesses to navigate shipping logistics, accounting practices, and ensure transparent and efficient transactions. If you have any further questions or if there's a specific aspect you'd like more information on, feel free to ask.
FAQs
FOB shipping point, or free on board shipping point, is a shipping term that refers to the sale of goods that takes place when the seller or provider of those goods ships out a product. Essentially, the sale is finalized as soon as the product is taken by the shipping carrier, before being transported to the buyer.
What does FOB shipping point mean? ›
What is FOB Shipping Point? The term FOB shipping point is a contraction of the term "Free on Board Shipping Point." It means that the buyer takes delivery of goods being shipped to it by a supplier once the goods leave the supplier's shipping dock.
What does FOB stand for in shipping? ›
FOB is a shipping term that stands for “free on board.” If a shipment is designated FOB (the seller's location), then as soon as the shipment of goods leaves the seller's warehouse, the seller records the sale as complete.
What are the disadvantages of FOB shipping point? ›
The main disadvantage of FOB for the buyer is that they are responsible for any loss or damage that occurs during the transport, and they may face delays or extra charges at the destination port. The main advantage of FOB for the seller is that they have less risk and liability once the goods are loaded on the vessel.
What does FOB destination mean? ›
FOB (Freight on Board) Destination is a shipping term which means that the seller retains the legal title to the goods until they reach the location of the buyer. In this case, the seller pays for the transportation of the freight and takes care of additional freight charges until the goods reach the buyer.
Who pays for freight on FOB shipping point? ›
In FOB shipping point agreements, the seller pays all transportation costs and fees to get the goods to the port of origin. Once the goods are at the point of origin and on the transportation vessel, the buyer is financially responsible for costs to transport the goods, such as customs, taxes, and fees.
Who pays the duty on FOB destination? ›
Once on the ship, the buyer is responsible financially for transportation costs, customs clearance, fees, and taxes. Conversely, with FOB destination, the seller pays the shipment cost and fees until the items reach their destination, such as the buyer's location.
Why is it called a FOB? ›
The word “fob” was likely derived from the German fuppe, meaning “pocket.” Before key fobs were an electronic device, they were another word for decorative keychains throughout the 20th century.
What is an example of a FOB? ›
For example, if a buyer in Vancouver buys basketball shoes from a seller in Chengdu, China, he must pay for the transport costs from the seller's warehouse to the port, cost of loading goods onto a ship, and all transport costs from the shipping port to his warehouse/store.
Is FOB shipping cheaper? ›
Buyers generally consider FOB agreements to be cheaper and more cost-effective. That's because they have more control over choosing shippers and insurance limits. CIF contracts, on the other hand, can be more expensive. Since the seller has more control, they may opt for a preferred shipper who may be more costly.
In FOB shipping points, if the terms include "FOB origin, freight collect," the buyer pays for freight costs. If the terms include "FOB origin, freight prepaid," the buyer is responsible for the goods at the point of origin, but the seller pays the transportation costs.
Who owns FOB shipping point vs destination? ›
In a FOB shipping point contract, the seller transfers any title of ownership to the buyer upon the product leaving the seller's location. The buyer then has full ownership. In a FOB destination sale contract, the buyer may not receive the title of ownership until the product reaches the buyer's location.
Is FOB shipping safe? ›
Free on Board, or FOB is an Incoterm, which means the seller is responsible for loading the purchased cargo onto the ship, and all costs associated. The point the goods are safe aboard the vessel, the risk transfers to the buyer, who assumes the responsibility of the remainder of the transport.
How does FOB shipping work? ›
FOB destination means the seller is responsible for the goods until they reach the buyer's location. In contrast, FOB origin means that the buyer is responsible for the goods when they are shipped from the seller's location. FOB shipping affects the cost, liability, and accounting of the goods in transit.
What is the opposite of FOB shipping? ›
In a nutshell, the major difference between FOB and CIF is in transference of liability and ownership. With FOB, title possession and liability usually shift when the shipment leaves the point of origin. With CIF, responsibility moves to the buyer once the goods reach the point of destination.
What is FOB pricing? ›
FOB Price Meaning: Without transportation costs included in COGS, orders are referred to as freight on board (FOB). FOB pricing refers to when the retailer/buyer is responsible for the shipping costs from the seller's warehouse to the retailer's/buyer's destination.
What is the difference between FOB and delivered? ›
FOB pricing refers to when the retailer/buyer is responsible for the shipping costs from the seller's warehouse to the retailer's/buyer's destination. Delivered Price Meaning: When a brand is responsible for delivering its product(s) to a retailer/receiver they have agreed to a delivered pricing arrangement.
Is FOB only for sea freight? ›
Incoterms. Under the Incoterms 2020 standard published by the International Chamber of Commerce, FOB is only used in sea freight and stands for "Free On Board". The term is always used in conjunction with a port of loading. Destination need not be specified and may be left "free".
What is the FOB method of payment? ›
Free on Board (FOB)
Under a FOB agreement, the supplier assumes responsibility until the goods are loaded onto the shipping vessel. This means they pay for the goods to be transported to the port and onto the vessel. As such, the seller has a limited set of responsibilities under the contract.
What is the difference between FOB and ex works? ›
What Do EXW and FOB Stand for? EXW stands for Ex Works, an Incoterm whereby the buyer of a shipped product pays for the goods when they are delivered to a specified location. FOB, or Free on Board, instead shifts the responsibility of the goods to the buyer as soon as they are loaded onboard the ship.
