If a shipment is sent under FOB destination terms, the seller won’t record the sale until the goods reach the buyer’s location. Likewise, the buyer won’t officially add the goods to its inventory fob shipping point until they arrive and are inspected. FOB stands for either “free on board” or “freight on board.” The term is used to designate buyer and seller ownership as goods are transported.
Why Is FOB Important to Small Business Accounting?
- FOB destination shipping is in the buyer’s best interest and an effective way for businesses to enhance their customer service.
- A free on board contract is much cheaper than a cost, insurance, and freight agreement.
- Once past the ship’s rail and cleared for export, the responsibility shifts to the buyer.
- In addition, if the seller is unfamiliar with customs and taxes in the buyer’s port of entry, there may be additional delays and hassles.
- The phrase “passing the ship’s rail” was dropped from the Incoterm definitions in the 2010 amendment.
It’s an agreement between the buyer and seller that specifies when the ownership and liability for the goods being shipped transfer from the seller to the buyer. FOB terms are typically included in shipping orders and contracts, detailing the time and place of delivery, payment terms, and which party handles freight costs and insurance. FOB freight prepaid and added specifies that the seller is obligated to pay the freight transportation charges but the seller bills the cost of transportation to the buyer. The seller assumes the risk of loss of or damage to goods during transportation because the seller owns the goods during transit. If the terms include the phrase “FOB Origin, freight collect,” the buyer handles freight charges.
What Does FOB Mean on an Invoice? Shipping Invoice Definitions
A free on board (FOB) designation specifies whether the buyer is responsible for freight charges. There are two main types of free on board freight with several sub-designations, including FOB destination and FOB shipping point. FOB shipping point holds the seller liable for the goods until they’re transported to the customer, while FOB destination holds the seller liable for the goods until they have reached the customer.
Use a freight forwarder
- On the flip side, FOB arrangements tend to be more cost-effective for buyers and give them more control over the timing and price of shipments.
- Read all contracts carefully, calculate potential costs, purchase insurance—and consider negotiating additional terms in your shipping or sales agreement to protect against losses.
- In this case, the seller completes the sale in its records once the goods arrive at the receiving dock.
- With an accrual accounting system, income and expenses are reported as soon as cash is earned or debt is incurred.
- Likewise, the buyer won’t officially add the goods to its inventory until they arrive and are inspected.
While the seller does bear higher costs under FOB destination, they can factor shipping costs into pricing. Because of this, misunderstanding FOB shipping point terms can be costly for buyers. Imagine you’re a small business owner who secures a deal to import antique furniture from an overseas supplier. You see the term “FOB shipping point” in the contract but, unsure what it means, you sign away.
Port handling at the FOB destination
Incoterms apply to both international trade and domestic trade, as of the 2010 revision. Shipping using the designation Ex Works (EXW) indicates the seller has a responsibility to make sure the buyer can access and pick up the cargo at their place of business. Remember, while FOB and other Incoterms are internationally recognized, trade laws vary by country.
Cost, Insurance, and Freight (CIF)
- After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.
- 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.
- Essentially, as soon as your freight is on board, you’re the one liable for them.
- If a shipment is designated as FOB Shipping Point, the sale will be recorded in the accounting system as soon as the shipment leaves the seller’s dock.
- However, whether it works out to be less expensive in the end depends on the rates you secure.