What is FOB Shipping Point in Accounting & How does it Work?

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.

As we already have seen with FOB, sellers do not assume much responsibility unless it is the FOB destination. Even when sellers pay for the shipment charges, they can get reimbursed by buyers based on mutual agreement. Also, under FOB shipping point terms, the customer is responsible for the cost of shipping the product.

What is FOB?

Traders told Reuters at the time that this had weighed on Russian wheat’s competitiveness, with GASC buying cheaper Romanian and French wheat instead. In a tender last week, all Russian suppliers had submitted bids at a price floor set at $270 per metric ton on a FOB basis, with C&F prices ranging between $286.25 and $291 per metric ton. Traders told Reuters the price floor was not legally binding but https://online-accounting.net/ that suppliers were expected to follow instructions from Russia’s agriculture ministry. Traders have told Reuters the price could possibly be below an unofficial floor set by Russia’s government to control domestic wheat prices. 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.

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.

Save time and money on deliveries

FOB is only used in non-containerized sea freight or inland waterway transport. As with all Incoterms, FOB does not define the point at which ownership of the goods is transferred. The transportation department of a buyer might insist on FOB shipping point terms, so that it can take complete control over the delivery of goods once they leave a supplier’s shipping dock. Now assume that a seller quoted $975 FOB destination and the seller loaded the goods onto a common carrier on December 30. Also assume that the goods are on the truck until January 2, when they are unloaded at the buyer’s location.

Whichever party pays for sending will have to enter those costs in the ledger, too. When it comes to FOB, the person responsible for the cost of sending depends on the specific terms of the arrangement, so it’s important to know the different FOB terms you might find in sending documents. In fact, the International Chamber of Commerce (ICC) published a set of international trade terms called the International Commercial Terms (Incoterms) to help clarify things. With the advent of e-commerce, most commercial electronic transactions occur under the terms of «FOB shipping point» or «FCA shipping point». In the case of a FOB destination, the ownership of the product is transferred from the seller to the buyer only upon receipt of goods at the buyer’s place. Similarly, the buyer needs to update their inventory and make a note of the incoming shipment.

Freight on Board Example

Once the goods are delivered to the buyer’s specified location, the title of ownership of the goods transfers from the seller to the buyer. Consequently, the seller legally owns the goods and is responsible for the goods during the shipping process. These international contracts outline provisions including the time and place of delivery as well as the terms of payment agreed upon by the two parties.

In international trade, ownership of the cargo is defined by the contract of sale and the bill of lading or waybill. 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. The buyer is not responsible for the goods during transit; therefore, the buyer often is not responsible for paying for shipping costs. The buyer is also able to delay ownership until the goods have been delivered to them, allowing them to do an initial inspection prior to physically accepting the goods to note any damages or concerns.

FOB origin explained

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 cost of debt 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.

• 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.
• For example, assume Company XYZ in the United States buys computers from a supplier in China and signs a FOB destination agreement.
• 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.
• FOB in accounting says the buyer in an FOB Shipping Point transaction takes ownership at the supplier’s dock.
• When the shipment arrives at the origin, the buyer needs to attain responsibility for them.
• Emerging events such as terrorism, piracy, and a rogue government can result in increased freight costs as shipping companies attempt to recover losses incurred.

These delays can cause delays in payment and customer satisfaction issues. If there are any damages to the cargo enroute, the buyer needs to take relevant measures like filing for reimbursement claims. Since the shipment becomes the buyer’s responsibility, the seller has no further role in the process. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping.

FOB Shipping Point Accounting

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.

• Nearshoring, the process of relocating operations closer to home, has emerged as an explosive opportunity for American and Mexican companies to collaborate like never before.
• Super Widgets, Inc. agrees to ship the goods based on “FOB origin, freight prepaid” terms.
• When at the shipping point, the buyer now has an open accounts payable balance though it also should now carry the treadmill on their financial records.
• For example, if a company was shipping its goods to New York City, it would be written out as FOB New York.
• 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.

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.