What is the significance of FOB Shipping Point and FOB Destination?

If “Freight Prepaid” is where the seller takes on the shipping costs, “Freight Collect” flips that script. In a Freight Collect arrangement, the buyer pays for all shipping costs, from the originating port to the final destination. This means that the buyer assumes ownership and responsibility as soon as the goods are safely loaded onto a shipping vessel. It contains elements such as delivery location and time when the risk of loss moves from the seller to the buyer, payment, and who pays for shipping costs and insurance. FOB Destination transfers the responsibility of shipped goods when they arrive at the buyer’s specified delivery location – usually the buyer’s loading dock, post office box, or office building. Once the products arrive at the buyer’s location, the legal title of ownership transfers from the seller to the buyer.

Time Value of Money

They are among the most common of the 11 international commerce terms (Incoterms), which were established by the International Chamber of Commerce (ICC) in 1936. The buyer assumes all risks and benefits of ownership as of the moment the shipment arrives at the shipping dock. Also, under FOB destination conditions, the seller is liable for the merchandise’s transportation costs. Since the buyer takes ownership at the point of departure from the supplier’s shipping dock, the supplier should record a sale at that point. Also, under these terms, the buyer is responsible for the cost of shipping the product to its facility. Many times, sellers will invoice buyers for the cost of shipping and insurance, adding extra fees to increase their profit.

FOB shipping point always benefits the seller

To simplify and expedite the process of winning clients’ business and getting paid, use Deskera’s proven software solutions for businesses and free templates. However, the vendor is only responsible for delivering the products to the closest delivery port. Once the products came from the supplier, the buyer would have to add $80,000 to their inventory and $80,000 to their accounts payable. Even if the products had not yet arrived, the inventory would be a valuable asset in their accounts.

What does FOB mean on an invoice?

• Understanding these variations can profoundly affect your supply chain and your ability to manage shipping costs effectively.
• Or, the responsibility can transfer to the buyer once he or she receives the goods if there is a FOB Destination agreement in place.
• Because of this, misunderstanding FOB shipping point terms can be costly for buyers.
• If your items are expensive, unique, or in a category where obtaining insurance is difficult, negotiating for FOB destination may be a better option.

FOB shipping point transfers the goods to the buyer at the point the goods are loaded into the truck or the shipping point. Also, shipping point usually implies that the buyer pays for the freight charges to ship the goods. This means that as soon as the seller loads the goods onto the freight truck, they are legally owned by the buyer. If anything happens to the goods in transit, the buyer is responsible for them—not the seller. Although the accounting treatment mentioned above aligns with this, it’s worth mentioning that FOB shipping points and destinations transfer ownership at different times.

It’s possible to turn into a cash-only business model, only recording the transaction in the ledger when the buyer pays. Such disagreements, especially when goods are in transit or have already been delivered, can be both financially and operationally taxing. For buyers, FOB, especially the FOB Shipping Point, presents an opportunity to exert more control over the shipping process.

• When the voyage begins, the buyer then assumes full liability, including transport, insurance, and additional fees.
• Generally, FOB is specified in a sales agreement and is accounted for under inventory costs.
• Buyers can sign with the shipper of their choice and take as much coverage as they see fit to insure their shipments.
• In fact, we offer a wide range of important software requirements for businesses.
• 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.

While “FOB Origin” and “FOB Destination” are standard, there are other terms that offer nuanced differences. Since the seller has more control, they may opt for a preferred shipper who may be more costly. They may also choose higher insurance limits, as they want to ensure that the goods are delivered in excellent condition.

The term “free on board” is also used interchangeably with “freight on board.” However, this does not adequately reflect how it works in practice. FOT (Free on Truck) is a term referring fob shipping point to cargo being carried by truck and can be used when shipping goods by truck. FOB (Free on Board) is an Incoterm® referring to cargo carried via sea or inland waterway.

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

What is FOB Destination? Meaning, Terms, Who Pays?

• As an example of FOB shipping point accounting, suppose the value of the goods is again 5,000 and the freight expense from the shipping point of 600 is paid in cash by the buyer.
• The buyer is not responsible for the goods during transit; therefore, the buyer often is not responsible for paying for shipping costs.
• 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.
• Keep in mind, though, that CIF agreements are normally much more expensive than others.