The distinction of Free on board destination or FOB destination from FOB shipping point is that the seller remains liable for any loss or damage of the package until it gets delivered to the buyer. The buyer marks it an increase in stock once the package is delivered in good condition and gets to the warehouse. Likewise, the transportation cost will include in the journal entry for FOB shipping point on the buyer’s side.
FOB stands for Free on Board, and it dictates where the responsibilities are split between the buyer and seller during the shipping process of international transactions. FOB or Free On Board is the freight term that is usually used in shipping. This freight term is usually stated on the invoice in order to determine Running Law Firm Bookkeeping: Consider the Industry Specifics in the Detailed Guide who is responsible for the transportation of goods, the buyer or the seller. Since the package was shipped using shipping point, the title of the goods transferred when GM placed the package on the loading dock. On the other hand, the accounting rules are different when operating under FOB destination.
FOB Destination Point
Incoterms is short for International Commercial Terms, which is published by the International Chamber of Commerce (ICC). Incoterms is updated each decade, with the 2020 Incoterms published in late 2019. Incoterms are agreed-upon terms that define transactions between shippers and buyers, so importers and exporters can speak the same shipping language.
While there are pros and cons to all of these choices, it’s crucial to remember that the goods being imported and exported will determine which transportation method is best. For instance, DDP may not be the best choice when importing expensive goods like electronics or jewelry because of the significant customs charges that must be paid at the border. However, the buyer subtracts the shipping charges from the supplier’s bill rather than footing the bill out of pocket. In this arrangement the vendor still owns the items while they are in transit.
Definitions of FOB shipping point and FOB destination
FOB shipping point is an important consideration in international trade and can have significant implications for both buyers and sellers. It helps to clarify responsibilities, allocate costs, and manage risk during transportation. Now assume that a seller quoted $975 FOB destination and the seller loaded the goods onto a common carrier on December 30.
First, the acronym FOB is a shipping term that stands for ‘free on board’. Free on board is a trade term that is used to determine or indicate whether the seller or the buyer is accountable for any damaged, lost, or destroyed package within the shipment process. Delivered Duty Paid (DDP) places the maximum responsibility on the seller’s side.
Port handling at the FOB destination
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. For example, if a manufacturer sells products to a retailer with terms specified as “FOB Shipping Point,” the retailer takes ownership of the goods as soon as they leave the manufacturer’s shipping dock.
The title of ownership is transferred at the buyer’s specified address, loading dock, office address, etc. Once the products are delivered to the FOB address stated as the buyer’s address, it will be counted as a complete sale on the seller’s inventory while an increase on the buyer’s warehouse stock. With FOB Destination, the seller is responsible for transporting goods from the origin point to the shipping point. They are also responsible for loading the cargo onto the vessel and paying the costs of shipping the freight to the buyer’s named port. The buyer then takes responsibility for the goods once they have arrived at the named port. When accounting for shipping costs, accountants assume follow the shipping terms to determine who is responsible for this expense.
The point at which the title and responsibility for transportation costs transfers is essential to the various forms of FOB destination. The transportation department of a forward-thinking customer could choose FOB shipping point terms over FOB destination ones to maintain tighter control over the logistics process. On the other hand, another International commercial term used in the shipping process is the FOB shipping destination.
Traditionally with FOB shipping point, the seller pays the transportation cost and fees until the cargo is delivered to the port of origin. Once on the ship, the buyer is responsible financially for transportation costs, customs clearance, fees, and taxes. Conversely, with FOB destination, the seller pays the shipment cost and fees until the items reach their destination, such as the buyer’s location. That destination is the receiving port, not the final stop or seller’s warehouse in the journey across the country. The buyer assumes fees like customs clearance fees and taxes at port entry.
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 qualifiers of FOB shipping point and destination are sometimes used to reduce or extend the responsibility of the supplier in an FOB shipping agreement. Buyer will not be responsible for any shipping costs of the goods and their damage if happens. Freight Prepaid and Added where the seller pays the freight charges and add it to the buyer’s invoice. If a seller ships goods to a customer that are lost in transit, the shipper must compensate for the loss by replacing the products or reimbursing the buyer for the cost. If you’re in the shipping industry, you need to be familiar with the shipping term FOB destination and all it implies.
- If a shipment is sent FOB Shipping Point (the seller’s warehouse), then the sale is concluded as soon as the truck pulls out of the seller’s loading dock and is noted in the accounting system as such.
- This means that no matter where you ship from, you will encounter the same regulations.
- With this specific configuration, the title of the goods transfers from the seller to the buyer once the goods are shipped.
- To that end, many companies establish contracts between their organization and their customers, which can help streamline the process of shipping goods internationally.
- The determination of who will be charged the freight costs is usually indicated in the terms of sale.
- After the title is transferred, the seller’s responsibility ends, and it falls to the buyer to ensure their goods reach their final destination promptly and in sound condition.