FOB Shipping Point vs. FOB Destination (With Examples)

By Indeed Editorial Team

Published June 26, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

International trade laws help facilitate sale contracts between sellers and buyers, as trade laws may differ between countries. International sellers use FOB shipping point and FOB destination in contracts to indicate the point at which the title of goods transfer from the seller to the buyer. Understanding these terms and how they differ can help you evaluate international contracts to understand the responsibility and liability when trading goods. In this article, we define FOB shipping point and FOB destination, explain how these terms differ, describe the importance of understanding the differences, and provide examples of each.

What is free on board (FOB) shipping point?

FOB shipping, also known as FOB origin, is an international shipping term that refers to the sale of goods that takes place when the seller ships out a product. This indicates that the seller transfers the title of the goods to the buyer once the seller places the goods on the vehicle for delivery. The sale of a free on board shipping point contract completes when the shipping carrier receives the product, even before the buyer receives the goods. In FOB shipping point sales, the legal transfer of ownership also indicates the buyer pays for shipping and insurance costs.

It's important for both parties in a FOB shipping point contract to have a strong understanding of the terms to ensure a smooth transfer of goods and legal ownership. The terms can have a significant impact on both parties' inventory, shipping, and insurance costs. In international shipments, FOB refers to non-containerized sea freight or inland waterway transport.

Read more: Definitive Guide to Freight on Board and Its Importance

What is free on board (FOB) destination?

FOB destination point is an international shipping term that refers to a contract where the arrival of the goods at the shipping destination signifies the conclusion of the transaction. Also known as cost, insurance, and freight (CIF), in this FOB agreement, the seller holds responsibility for shipping costs and liabilities regarding the product while the goods are in transport. Only when the goods reach the buyer's destination, such as a loading dock, post office box, home, or office building, does the seller legally transfer the ownership.

This means the seller claims responsibility for the products during transport until they reach the buyer. For example, if a company orders products from another country under the FOB destination terms and doesn't receive the product, the seller takes full responsibility for the items. The shipper might offer a refund for the undelivered products or offer to reship the order. In this type of contract, the buyer may still assume liability for additional fees such as customs or duty charges.

Related: What Are Freight Out Charges? (And How to Record Them)

Differences between FOB shipping point vs. FOB destination

Aside from the primary difference in the timing of the ownership transfer, there are several differences between FOB shipping point vs. FOB destination. Here's how the FOB shipping point and the FOB destination terms differ:

Accounting rules

In a FOB shipping point sale, the buyer assumes responsibility and legal liability for the goods purchased once delivered to the shipping provider. For this type of sale, the buyer records the sale in their accounts payable at the point of transport, indicating that the buyer has observed an increase in their inventory. The seller also records the sale at the time of shipment. They may record the sale in their accounts receivable as an added payment regardless of whether the seller has submitted payment. The seller may also record the decrease in inventory at the time of delivery to the shipper.

Conversely, with a FOB destination sale, the buyer transfers the ownership of the goods once the shipper delivers them to the destination point. At this point, both the buyer and seller record the accounting transactions and state the increase and decrease in their respective inventories.

Related: What Are Accounting Transactions? (Definition and Examples)

Transfer of sale

Another significant difference between FOB terms point at which the ownership transfers. In a FOB shipping point contract, the seller transfers the title of ownership to the buyer once the seller has provided the goods to the shipper. From this point, the buyer has full ownership of the products, taking responsibility for any issues in transit. Conversely, in a FOB destination sale contract, the buyer receives the title of ownership once the product reaches the buyer's location. In this instance, the seller holds ownership of the goods throughout the transport of the products to the buyer.

Costs of transport

Another difference between the FOB terms is the responsibility for the transportation costs. In a FOB shipping point contract, the buyer pays for the costs of the shipment, as the buyer has full legal ownership of the products once received by the shipper. With a FOB destination contract, the seller pays for the shipping costs, including insurance or liability costs accrued throughout the transport of the goods, until the buyer receives the product.

In both instances, the buyer incurs any additional costs associated with the delivery, once the goods reach the destination. For example, when a buyer picks up the product from the shipping warehouse, they are required to complete the customs forms and submit the payment for any duties and fees. For some larger or more complicated shipments, some businesses engage with a broker to coordinate this last part of the delivery.

Related: A Guide to Indirect Costs (With Cost Allocation Methods)

The importance of understanding FOB terms

Understanding the difference between FOB shipping point and FOB destination can help inventory managers determine the accuracy of the shipping charges when they receive a bill of landing. Errors may lead to inaccurate shipping costs for which an organization might not be legally responsible, so a proper understanding of these terms can protect organizations from overspending. Business managers, accountants, and other professionals handling purchasing require a thorough understanding of these terms when reviewing and approving contracts. This is important, as the terms affect shipping budgets, the liability of damaged or undelivered products, and the proper inventory accounting protocol.

A misunderstanding about the terms of a contract may cause delays in recording expenses, directly affecting net income. It's important for accountants to report inventory and the cost of goods on the correct date, as this changes depending on the FOB terms. Further, the shift in liability from the seller to the buyer may affect profits and losses if there's damage during transit. Understanding the transfer of ownership is important for contract negotiators when evaluating the risk associated with FOB shipping point terms.

Related: A Guide to Understanding the Negotiation Process (With Stages)

Example of FOB shipping point

Here's an example of how a business might account for a purchase with a FOB shipping point:

Wavewood Fitness has purchased exercise equipment for a new gym location at a quoted price of $925.75 with a FOB shipping point stated in the contract. The seller marks the product for transport on July 5, where the equipment is in transit until it arrives at the new Wavewood location, with delivery scheduled for July 10. To update inventory records, the seller records the sale for July 5 as an account receivable and a reduction in inventory.

Wavewood Fitness also records the purchase of the equipment in the accounts payable and an increase in inventory when the buyer delivers the products to the shipper on July 5. Since the contract states a FOB shipping point, the goods belong to the buyer, who pays the shipping costs besides the cost of the equipment. If the equipment doesn't arrive on July 10, Wavewood Fitness assumes the liability for the lost products and files a claim to the shipping company. The seller's responsibility for the products ended when they delivered the goods to the shipping provider.

Related: Inventory Management Techniques (With Best Practices)

Example of FOB destination

Here's an example of how a business might account for a purchase with a FOB destination term:

Canadian Tech Crunch sells data chips to car manufacturers in Europe. When drafting a contract, they impose a FOB destination agreement stating that the sale price of the equipment is due upon the product's arrival at the buyer's destination. Tech Crunch uses their verified shippers to deliver their products, valued at $3,500,000 to their buyer. Unfortunately, there was an error in the shipment and only half of the products arrived at their destination in Europe. Even though Tech Crunch remains in contract with the seller, the FOB destination contract indicates that the seller takes full responsibility for the lost goods.

To rectify the situation, Tech Crunch can either reimburse the European company for the cost of the lost data chips or they can reship the items. This type of shipping term may affect Tech Crunch's inventory costs, including all expenses involved in preparing the inventory for sale. Tech Crunch files an insurance claim with the shipper, adds the costs to their inventory, and initiates the production of the lost data chips.

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