Finance Strategists has an advertising relationship with some of the companies included on this website. We may earn a commission when you click on a link or make a purchase through the links on our site. All of our content is based on objective analysis, and the opinions are our own. This can sometimes lead to inefficiencies, especially if the seller doesn’t have the same urgency or operational standards as the buyer. In this guide, we’ll walk you through the ins and outs of FOB accounting and what it might mean for your business.

«Freight On Board»

If the goods are FOB Shipping Point, the buyer is legally responsible for any damage in transit. Some buyers prefer FOB Destination because that lets them make the call on how the goods should be shipped, protected from damage and insured. In looking at the scenario above, the seller of the $50,000 worth of goods would have to invoice the seller for this amount.

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

The concept, outlined in the Incoterms list by the International Chamber of Commerce, streamlines shipping contracts and facilitates trade negotiations. FOB offers flexibility, cost savings, and clear allocation of responsibilities. Incoterms aim to simplify international trade by offering a standardized set of terms, reducing misunderstandings and disputes. In classic FOB contracts, sellers are relieved of responsibility and costs for their goods, once the goods are loaded onto a container ship. Generally, FOB is generally specified in a sales agreement and is accounted for under inventory costs. A buyer receiving goods FOB Destination might send them back to the seller if the shipment is badly damaged.

How Many Incoterms Are There and What Are They?

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. As a seller, what does fob stand for in accounting you would be responsible for any damage or loss of goods, as well as transportation costs, all the way to the port of Vancouver. Once the goods are loaded onto the ship, the responsibility for loss and damage, as well as for shipping costs, shifts to your buyer.

Are Free on Board Incoterms® the same as Freight on Board Incoterms®?

It’s important to note that there’s no change of ownership as result of the FOB agreement. The terms of ownership are set by the bill of sale or any other contract the buyer and seller have signed. If your business buys or sells goods overseas, choosing the best Incoterms® rule for your cargo can sometimes be confusing, especially if you’re new to the world of overseas freight shipping. The International Chamber of Commerce (ICC) publishes 11 Incoterms (international commercial terms) that outline the roles of both sellers and purchasers in global shipments. The ICC reviews and updates these terms once every decade; the next update is in 2030. If you’re in the shipping industry, you need to be familiar with the shipping term FOB destination and all it implies.

What does Free on Board (FOB) mean in shipping?

• As such, FOB shipping means that the supplier retains ownership and responsibility for the goods until they are loaded ‘on board’ a shipping vessel.
• Negotiating FOB shipping terms will often lead businesses to try and do everything themselves, explains Lajevardi.
• FOB shipping (origin) means the buyer takes responsibility for freight at the point of origin.
• 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).

Also, under FOB shipping point terms, the customer is responsible for the cost of shipping the product. 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). Also, under FOB shipping point terms, the supplier is responsible for the cost of shipping the product. The choice between FOB Origin and FOB destination depends on the specific needs of both parties.

The buyer then owns the products as soon as they leave the warehouse and therefore must pay any delivery and customs fees. Many times, sellers will invoice buyers for the cost of shipping and insurance, adding extra fees to increase their profit. Even so, buyers sometimes prefer CIF contracts because of the convenience of not dealing with any risks, claims, or freight issues while the goods are transported. Cost in freight (CIF) and free on board (FOB) are international shipping agreements used when shipping goods between a seller and a buyer.

If you use accrual accounting and the buyer doesn’t pay, you have to report this in your accounts receivable. Say the buyer defaulted on a $3,000 toy shipment after you entered it in your ledgers. You cut $3,000 from accounts receivable and enter $3,000 in the bad debt expense account. If you know from experience that, say, 7 percent of your accounts receivable won’t be paid, you set up an «allowance for doubtful accounts» entry in your records.

When the goods reach the buyer’s location, the title of ownership is shifted from the seller to the buyer. If the terms include the phrase «FOB Origin, freight collect,» the buyer handles freight charges. If the terms include «FOB Origin, freight prepaid,» the buyer assumes responsibility for goods at the point of origin, but the seller pays the cost of shipping. From an accountant’s viewpoint, FOB matters because it determines when you record the sale. For example, suppose the contract for a $200,000 shipment of jewelry sets the terms as FOB Origin. The seller can report $200,000 in accounts receivable and deduct $200,000 from the inventory account.