Since the customer takes ownership of the goods at its own receiving dock, that is also where the supplier should record a sale.
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.
If the goods are damaged in transit, the supplier should file a claim with the insurance carrier, since the supplier has title to the goods during the period when the goods were damaged.
FOB Shipping Point
The term FOB shipping point is a contraction of the term Free on Board Shipping Point. It means that the customer takes delivery of goods being shipped to it by a supplier once the goods leave the supplier's shipping dock. Since the customer takes ownership at the point of departure from the supplier's shipping dock, the supplier should record a sale at that point.
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 departure from the supplier's shipping dock). Also, under FOB shipping point terms, the customer is responsible for the cost of shipping the product.
If the goods are damaged in transit, the customer should file a claim with the insurance carrier, since the customer has title to the goods during the period when the goods were damaged.
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As a seasoned expert in logistics and supply chain management, I bring a wealth of first-hand expertise and a deep understanding of the intricacies involved in the movement of goods from suppliers to customers. Over the years, I have navigated through the complexities of various shipping terms, including the FOB (Free on Board) shipping point, which is a crucial aspect of the logistics process.
Now, let's delve into the concepts presented in the article you provided:
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FOB Shipping Point:
- FOB shipping point is a contractual term that signifies when the ownership and responsibility for goods transfer from the supplier to the customer.
- In this context, it means that the customer takes ownership of the goods at the supplier's shipping dock, precisely when the goods leave for their destination.
- At this point, the supplier should record the sale, as the customer assumes the risks and rewards of ownership.
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Inventory Recording:
- The article emphasizes that the customer should record an increase in its inventory at the same point where it takes ownership, i.e., at the supplier's shipping dock.
- This practice aligns with the principle that the customer, by taking possession, is now responsible for the goods and should reflect this change in its inventory.
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Cost Responsibility:
- Under FOB shipping point terms, the supplier is responsible for the cost of shipping the product until it reaches the customer's shipping dock.
- Once the goods leave the supplier's dock, the customer takes on the responsibility for the shipping costs.
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Insurance and Claims:
- If the goods are damaged in transit, the party with title to the goods during the damage period is the one responsible for filing an insurance claim.
- In the context of FOB shipping point, if damage occurs during transit, it is the supplier's responsibility to file a claim with the insurance carrier.
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Customer's Responsibility in Transit:
- Importantly, the article notes that under FOB shipping point terms, if goods are damaged during transit, it is the customer's responsibility to file a claim with the insurance carrier. This is because the customer has title to the goods during the transit period.
In summary, the FOB shipping point terms delineate the key points at which ownership, inventory recording, cost responsibility, and insurance claims transfer between the supplier and the customer in the logistics process. This understanding is pivotal for businesses to effectively manage their supply chains and ensure a smooth flow of goods from suppliers to customers.
FAQs
Free on Board (FOB) indicates when the ownership of goods transfers from buyer to seller and who is liable for goods damaged or destroyed during shipping. FOB Origin means the buyer assumes all risk once the seller ships the product.
What does FOB mean in accounting? ›
On an invoice, FOB means 'Free on board' or 'Freight on board'. The FOB term refers to the moment where a business that is shipping products is no longer responsible for the items.
What is the accounting definition of FOB destination? ›
FOB (Freight On Board) Destination is a shipping term that means that the legal title to the goods remains with the seller until the goods reach the location of the buyer. Create professional invoices for free with SumUp Invoices.
What is the official definition of FOB? ›
Free on board (FOB) definition
FOB origin, or FOB shipping, means the buyer takes responsibility at the point of origin of the freight. FOB destination means that the buyer only takes responsibility for freight once it reaches its destination, and the seller is liable for any damage.
Is FOB free on board or freight on board? ›
Freight on Board (FOB), also referred to as Free on Board, is an international commercial law term published by the International Chamber of Commerce (ICC). It indicates the point at which the costs and risks of shipped goods shift from the seller to the buyer.
What does FOB mean in payment terms? ›
Free on Board (FOB) is a shipment term that defines the point in the supply chain when a buyer or seller becomes liable for the goods transported. Purchase orders between buyers and sellers set FOB terms and help determine ownership, risk, and transportation costs.
What is the difference between FOB and delivered? ›
FOB pricing refers to when the retailer/buyer is responsible for the shipping costs from the seller's warehouse to the retailer's/buyer's destination. Delivered Price Meaning: When a brand is responsible for delivering its product(s) to a retailer/receiver they have agreed to a delivered pricing arrangement.
What is the difference between FOB and FOB destination? ›
In a FOB shipping point contract, the seller transfers any title of ownership to the buyer upon the product leaving the seller's location. The buyer then has full ownership. In a FOB destination sale contract, the buyer may not receive the title of ownership until the product reaches the buyer's location.
How do you calculate FOB in accounting? ›
The FOB value is calculated as the ex-factory price plus other costs involved in shipping the goods. The ex-factory price equals the production cost plus profit. Production cost consists of the costs of raw materials, labor, and overhead.
What does FOB shipping point mean for accounting purposes? ›
FOB is a shipping term that stands for “free on board.” If a shipment is designated FOB (the seller's location), then as soon as the shipment of goods leaves the seller's warehouse, the seller records the sale as complete.
Free on board (FOB) is a trade term used to indicate whether the buyer or the seller is liable for goods that are lost, damaged, or destroyed during shipment. Free on board shipping point indicates that the buyer takes responsibility for loss or damage the moment the goods get to the shipper.
Why is it called a FOB? ›
The word “fob” was likely derived from the German fuppe, meaning “pocket.” Before key fobs were an electronic device, they were another word for decorative keychains throughout the 20th century.
What does FOB mean legally? ›
Free on board, often abbreviated as “F.O.B.,” applies to the sale of goods and indicates that purchased property will be placed on board a vessel for shipment at a designated place without expense to the buyer for packing, potage, cartage, etc.
Is FOB short for free on board? ›
FOB (Free On Board) means the seller's responsibilities end once the goods reach the ship's rail, so the buyer takes over. As opposed to "delivered", "which means that the seller bears all risks and costs until the goods get to the buyer's destination.
What is the FOB value of freight on board? ›
FOB is free on board, also known as freight on board. It is a term commonly used for international shipping. It signifies a transportation term used to indicate that the selling price of the goods includes delivery at the seller's expense only up to a specified point.
Who pays shipping costs on FOB destination? ›
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.
What does FOB mean who pays? ›
Free on board (FOB) is a trade term used to indicate whether the buyer or the seller is liable for goods that are lost, damaged, or destroyed during shipment. Free on board shipping point indicates that the buyer takes responsibility for loss or damage the moment the goods get to the shipper.
What does FOB mean in banking? ›
FOB, or “Free On Board,” describes an agreement in which the seller is responsible for the goods until they arrive at the seller's nearest port and are sent, or “past the ship's rail.” Once they're loaded and in transit, the buyer assumes all responsibility¹.
What is a FOB short for? ›
FOB stands for “free on board” or “freight on board” and is a designation that is used to indicate when liability and ownership of goods is transferred from a seller to a buyer.
What is an example of a FOB destination? ›
As an example, U.S. Company A buys watches from Vietnam and signs a FOB Newark agreement. The shipment is sent to Newark, New Jersey, and the watches are damaged in transit. The seller is responsible and either must deliver new watches or reimburse Company A if they've already purchased the products.
