Sight drafts that allow the seller to draw their payment out of the buyer’s bank account are a standard method in international shipping. A letter of credit from the buyer’s bank can also protect the seller from cheating buyers. Our Q & A section includes a worked example of FOB shipping point freight prepaid. 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).
Difference between CIF and FOB
The income statement shows whether your business is profitable; the cash flow statement shows whether you have enough cash on hand to pay employees and creditors. Since the customer takes ownership of the goods at its own receiving dock, that is also where the supplier should record a sale. Alternatively, FOB destination places the delivery responsibility on the seller. The seller maintains ownership of the goods until they are delivered, and once they’re delivered, the buyer assumes ownership. For example, assume Company XYZ in the U.S. buys computers from a supplier in China and signs a FOB destination agreement. Assume the computers were never delivered to Company XYZ’s destination, for whatever reason.
- The customer should record an increase in its inventory at the same point (since the customer is undertaking the risks and rewards of ownership, which occurs at the point of arrival at its shipping dock).
- It indicates the point at which the costs and risks of shipped goods shift from the seller to the buyer.
- For FOB Shipping Point agreements, the buyer assumes the risk almost immediately after the transaction starts, which can be unnerving, especially for high-value goods or volatile shipping routes.
- Subtracting 7 percent of accounts receivable on your financial statements gives you a more realistic view of how much income to expect.
What’s the Difference Between FOB Shipping Point and FOB Destination?
Once they take ownership of the goods, they can record an increase in inventory of $200,000 and $200,000 in accounts payable. If the shipment is FOB Destination, the same transactions take place, but only when the goods arrive at the receiving dock. CIF (Cost, Insurance, and Freight) and FOB (Free on Board) are two widely used Incoterm agreements.
In FOB Destination Point agreements, buyers often feel they’re in a passenger seat. The entire shipping process, from carrier selection to route decisions, is in the seller’s hands. Such disagreements, especially when goods are in transit or have already been delivered, can be both financially and operationally taxing. what does fob stand for in accounting Factors like the mode of transportation, the nature of the goods, the relationship between the buyer and seller, and individual preferences can all influence the choice of term. Other terms, like CIF (Cost, Insurance, and Freight) or EXW (Ex Works), offer different arrangements regarding costs, responsibilities, and risk points.
Who Pays for Shipping in FOB Shipping Point?
This means the seller retains ownership and responsibility for the goods during the shipping process until they’re delivered to the buyer’s specified location. For example, let’s say Company ABC in the United States buys electronic devices from its supplier in China and signs a FOB shipping point agreement. Company ABC assumes full responsibility if the designated carrier damages the package during delivery and can’t ask the supplier to reimburse the company for the losses or damages. The supplier’s responsibility ends once the electronic devices are handed over to the carrier. For FOB Origin, after the goods are placed with a carrier for transport, the company records an increase in its inventory and the seller records the sale.
Some buyers prefer FOB Destination because that lets them make the call on how the goods should be shipped, protected from damage and insured. As the goods were sold FOB destination the seller pays the expense of 600, and records this as Freight out under selling expenses. As an example of FOB destination accounting, suppose the value of the goods is 5,000 and the freight expense to the buyers destination of 600 is paid in cash by the seller. Once the goods are at the buyers destination, the ownership of the goods and the risk passes to the buyer. 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. The FOB point can either be the buyers destination, or the place from which the goods are shipped – the shipping point.
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. Recording the exact delivery time when goods arrive at the shipping point can be challenging.
Imagine the same situation above, except the agreement terms are for FOB destination. Instead, the manufacturer retains ownership of the equipment until it’s delivered to the buyer. Both parties don’t record the sale transaction in their general ledgers until the goods arrive at the buyer’s location. Additionally, if the goods are damaged in transit, the seller is responsible for replacing them at their own expense. In modern domestic shipping, the term is used to describe the time when the seller is no longer responsible for the shipped goods and when the buyer is responsible for paying the transport costs. Ideally, the seller pays the freight charges to a major port or other shipping destination and the buyer pays the transport costs from the warehouse to his store or vendors.
