FOB Shipping Point vs FOB Destination

Even when sellers pay for the shipment charges, they can get reimbursed by buyers based on mutual agreement. FOB (free on board) shipping point is a term used in the shipping of goods and services. It refers to the earliest point at which title and risk of loss pass from the seller (or exporter) to the buyer (or importer). When the shipment leaves a warehouse, the buyer assumes its responsibility and needs to pay the delivery charges. When accounting for shipping costs, accountants assume follow the shipping terms to determine who is responsible for this expense. If the sale occurred at the shipping point (FOB Shipping Point), then the buyer is expected to pay the cost of transporting the goods to their location and will therefore record this cost as Freight-In.

The supplier takes full responsibility for the computers and must either reimburse Company XYZ or reship the computers. Of course, it is in the buyer’s best interest to have the shipping terms be stated as FOB (the buyer’s location), or FOB Destination. That also means that if a pallet of jewelry is lost or damaged in shipment, the buyer must file any claims for reimbursement – not the seller – since the shipment became the buyer’s responsibility immediately. Free on Board destination denotes that when the responsibility for the goods transfers from the seller to the buyer when it reaches the buyer’s premises. In other words, the seller is the legal owner of the goods and is responsible for it while it is in transit.

This is usually the seller’s loading dock, delivery truck, or postage office. As soon as the seller brings the goods to the point of shipment, the legal title of those goods passes to the buyer and the seller is no longer responsible for the goods during delivery. If the carrier damages the package, the buyer can’t come after the seller because the title has already transferred. The seller’s only responsibility is to bring the package to the loading dock or delivery truck.

FOB Shipping Point vs. FOB Destination: What’s the Difference?

While free on board is the official term used when referencing FOB, it’s commonly referred to as “freight on board” and holds the same meaning. Depending on the agreement with your supplier, your goods may be considered delivered at any point between the port of destination and your final delivery address. Cost, Insurance, Freight (CIF) puts the liability of payment for – you guessed it – cost, insurance, and freight on the supplier. From there, the title for the goods transfers from the supplier to the buyer immediately and if anything happens to the goods at any leg of the journey to the buyer from there, the buyer assumes all responsibility. The term ‘free’ refers to the supplier’s obligation to deliver goods to a specific location, later to be transferred to a carrier. The term FOB is also used in modern domestic shipping within North America to describe the point at which a seller is no longer responsible for shipping costs.

• The seller has no legal reason to accept those goods back and the return shipment could possibly result in additional damages.
• FOB is important for a number of reasons, but most importantly, shippers and carriers need to understand FOB designations in damage situations.
• Shipping orders and contracts often describe the time and place of delivery, payment, when the risk of loss shifts from the seller to the buyer, and which party pays the costs of freight and insurance.
• This guide cuts through the legal jargon and explains everything you need to know about this common incoterm in plain English.

FOB is important for small business accounting because it sets the terms of the shipping agreement. FOB determines whether the buyer or the seller pays the shipping costs and who is responsible if the shipment is damaged, lost or stolen. CIF (Cost, Insurance, and Freight) and FOB (Free on Board) are two widely used INCOTERM agreements. With a CIF agreement, the seller pays costs and assumes liability until the goods reach the port of destination chosen by the buyer.

History of the Term

FOB is one of those seemingly complex transportation terms that are known as shipping terms of sale. The price of delivery is included with the price of the goods, or that the seller is prepared to ship it for free to a certain fob shipping point means point. They standardize rules and regulations relating to the shipment of goods (in our case, auto transportation / car relocation) to avoid complications that occur due to the different trade laws between countries.

• The determination of who will be charged the freight costs is usually indicated in the terms of sale.
• To fully grasp the concept, it’s important first to understand the difference between place of origin vs. place of destination and freight collect vs. freight prepaid.
• Upon delivery of the goods to the destination, the title for the goods transfers from the supplier to the buyer.
• Also assume that the goods are in transit until they arrive at the buyer’s location on January 2.
• The seller passes the risk to the buyer when the goods are loaded at the originating port.

The point of FOB shipping point terms is to transfer the title to the goods to the buyer at the shipping point. Goods in transit should therefore be reported as a purchase and as inventory by the buyer, and as a sale and an increase in accounts receivable by the seller. FOB shipping point terms indicate that the buyer assumes ownership of the goods as soon as they leave the supplier’s location. It’s common practice for the receiver of a shipment to refuse delivery if damages are visually present.

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

The legal issues raised in FOB designations are nothing new to us here at Freightquote. By utilizing our easy-to-use self-service tools, you can efficiently manage your shipping strategy, should any issues arise. 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. Unlike FOB shipping point, FOB destination, indicates that the ownership of goods is not transferred to the buyer until they arrive at their destination.

The shipment ownership from the buyer to the seller gets transferred at different times at the FOB shipping point and FOB destination. FOB shipping point involves ownership transfer when the seller delivers the goods at the origin point. Buyers need to assume responsibility for the shipment from this point and need to bear risks during the transportation. (The buyer will record freight-in and the seller will not have any delivery expense.) With terms of FOB shipping point the title to the goods usually passes to the buyer at the shipping point. This means that goods in transit should be reported as a purchase and as inventory by the buyer.

Key Differences

It pertains specifically to the International Chamber of Commerce’s Incoterms 2010, and is used when it comes to sea freight. For example, in international shipping, FOB [origination port] would mean that that the seller would be responsible for the cost of transporting and unloading the goods to the port of origin. The buyer would be responsible for the cost of insurance, ocean freight transport, unloading, and transporting the goods to their final destination from the arrival port.

Incoterms apply to both international trade and domestic trade, as of the 2010 revision. Since there is more than one set of rules, and legal definitions of FOB may differ from one country to another, the parties to a contract must indicate which governing laws are being used for a shipment. The most common international trade terms are Incoterms, which the International Chamber of Commerce (ICC) publishes, but firms that ship goods within the U.S. must adhere to the Uniform Commercial Code (UCC). When shipping goods to a customer, FOB shipping point or FOB destination may be two primary options to choose from. FOB shipping point holds the seller liable for the goods until the goods begin their transport to the customer, while FOB destination holds the seller liable for the goods until they have reached the customer.

The seller can also record a sale in their accounts when they transfer the ownership to the buyer. The seller holds a complete charge over the shipment when it is in transit and needs to ensure its safe delivery. A company working in London may order office supplies from a Germany-based vendor. If the supplier fails to deliver the shipment to the London-based company, they hold complete responsibility for the failed shipment.

The qualifiers of FOB shipping point and destination are sometimes used to reduce or extend the responsibility of the supplier in an FOB shipping agreement. Alternatively, FOB destination places the burden of delivery on the seller. When items are transported either domestically or internationally, the delivery must be accompanied by relevant documentation. The amount and type of documentation vary depending on whether the shipment is within the United States or to another country.

Contracts involving international transportation often contain abbreviated trade terms that describe conditions such as the time and place of delivery, payment, when the risk of loss shifts from the seller to the buyer. Other items include who pays the costs of freight and insurance considerations. The more common terms are called Incoterms, which the International Chamber of Commerce (ICC) publishes. The determination of who will be charged the freight costs is usually indicated in the terms of sale. If the Freight On Board is indicated as “FOB delivered,” the seller or shipper will be wholly responsible for all the costs involved in transporting the consignment.

With Synder, you’ll be able to keep track of your shipping amounts and record them into your books flawlessly. The Smart Rules engine may help you to calculate VAT for your sales based on the shipping address country or region. The fitness equipment manufacturer is responsible for ensuring the goods are delivered to the point of origin. This is the point of primary transportation in which the buyer will now assume responsibility for the treadmills. The equipment manufacturer would not record a sale until delivery to the shipping point; it is at this point the manufacturer would record an entry for accounts receivable and reduce its inventory balance. FOB historically had referred to the transfer of title and liability between buyers and sellers of goods, and it was used solely for goods transported by ship.

For FOB shipping, you can get an FOB price estimate using Freightos.com’s International Freight Rate Calculator. When you are shipping loose cargo (ie, not a full container), for example, your goods must go through a Container Freight Station (CFS) to be consolidated into a container. This guide cuts through the legal jargon and explains everything you need to know about this common incoterm in plain English. This means that no matter where you ship from, you will encounter the same regulations. One of the most prominent examples of this standardization is the International Commercial Term, or incoterm. Sometimes FOB is used in sales to retain commission by the outside sales representative.

Place of origin is when the buyer assumes ownership of the shipment as soon as the carrier picks it up and the bill of lading has been signed off on. On the other hand, place of destination assumes the seller owns and controls the goods until they have been delivered. Both place of origin and place of destination denote who actually takes responsibility for the freight at any given point in time. FOB means “free on board” or “freight on board.” It indicates when liability and ownership of shipped goods are transferred from a seller to the buyer. In other words, FOB shows who pays for shipping and when a supplier is no longer financially responsible nor liable for damages to or loss of shipped goods. Unlike EXW, when a buyer and a seller enter a Free on Board (FOB) trade agreement, the seller is obligated to deliver the goods to a destination for transfer to a carrier designated by the buyer.