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Free on Board FOB is a shipment term used to indicate whether the seller or the buyer is liable for goods that are damaged or destroyed during shipping. The purchaser pays the shipping cost from the factory and is responsible if the goods are damaged while in transit. Historically, FOB was used only to refer to goods transported by ship—in the U.
Contracts involving international transportation often contain abbreviated trade terms that describe matters such as the time and place of delivery, payment, when the risk of loss shifts from the seller to the buyer, and who pays the costs of freight and insurance. The most common international trade terms are Incoterms , which the International Chamber of Commerce ICC publishes, but firms that ship goods within the U.
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. Any vendor-client transaction needs to make clear FOB terms in the purchase order as these terms determine which party will pay for shipping and insurance costs.
However, it's worth noting that FOB status does not determine ownership—ownership is determined in the bill of sale or agreement between the buyer and seller. If the terms include the phrase "FOB destination, freight collect," the seller is responsible for the goods until they are delivered, and the buyer is responsible for freight charges. If the terms include "FOB destination, freight prepaid," the seller is responsible for goods until delivered, provided there are no insurance claims.
In this scenario, the seller is responsible for the freight charges. On the other hand, "FOB origin" or "FOB shipping point" indicates the opposite—that the buyer is responsible for goods soon as the vendor ships the goods. Depending on the FOB terms, the more often a company orders inventory, the more shipping, and insurance costs it will incur.
Companies can also incur costs when placing an inventory order through the price of hiring labor to unload the goods as well as the cost of leasing a warehouse to store the goods. A company can lower its inventory costs by ordering greater quantities and reducing the number of individual shipments it brings in.
Assume, for example, that Acme Clothing manufactures jeans and sells them to retailers such as Old Navy. Shipping terms affect the buyer's inventory cost because inventory costs include all costs to prepare the inventory for sale. Similarly, when Old Navy incurs other costs related to inventory, such as renting a warehouse, paying for utilities, and securing the warehouse, those costs are also added to inventory.
This accounting treatment is important because adding costs to inventory means the buyer does not immediately expense the costs and this delay in recognizing the cost as an expense affects net income. Another reason companies should be acutely aware of free on board FOB terms is that FOB establishes when the goods become an asset on the buyer's balance sheet.
This becomes especially important if a transaction occurs close to the transition from one accounting period to the next, such as the end of a calendar or fiscal year. Accountants need to know whether to include the freight on the company's balance sheet when the goods are shipped or when they are delivered. FOB destination would mean the seller carries the inventory on their balance sheet until it's delivered.
FOB shipping point means the buyer records merchandise when it's shipped. They are as follows:. The seller or shipper pays the cost of shipping. The buyer or receiver of goods assumes the responsibility of goods at the point of origin.
The buyer pays for freight and shipping costs. The buyer assumes full responsibility for the cargo until it reaches the point of destination or drop off. The seller does not pay the cost of shipping. Get cost savings tips, instant quotes, and new ideas to help streamline shipping for your small business.
What does FOB mean in shipping? Free on Board: Free on board indicates whether the seller or the buyer is liable for goods that are damaged or destroyed during shipping. Freight on Board: Freight on board is another term that is often used in place of free on board. Place of Origin vs. Place of Destination: Place of origin means the buyer assumes ownership of the shipment the moment the carrier picks up and signs the bill of lading while place of destination means the seller retains ownership and control of the goods until they are delivered.
Freight Prepaid: Freight collect means the person receiving the shipment is responsible for all freight charges. Why does FOB matter? Let us help. Get Your Shipping Quote Pickup location. Pickup location type Business Residential. Freight shipping how-to. Go to Shipping Guide. Related posts. Free white paper: 7 steps to become a preferred shipper. Download Now. Why work with us.
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