What are FOB Terms?
The term FOB is an abbreviation of free on board. If goods are shipped FOB destination, transportation costs are paid by the seller and title does not pass until the carrier delivers the goods to the buyer.
Accounting for Inventory Under FOB Terms
Good shipped under FOB terms are part of the seller’s inventory while in transit. If goods are shipped FOB shipping point, transportation costs are paid by the buyer and title passes when the carrier takes possession of the goods. These goods are part of the buyer’s inventory while in transit. The terms FOB destination and FOB shipping point often indicate a specific location at which title to the goods is transferred, such as FOB Denver. This means that the seller retains title and risk of loss until the goods are delivered to a common carrier in Denver who will act as an agent for the buyer. The rationale for these determinations originates in agency law, since transfer of title is conditioned upon whether the carrier with physical possession of the goods is acting as an agent of the seller or the buyer.
Related AccountingTools Courses
Accounting for Freight
Accounting for Inventory
Inventory Management
As an expert in accounting and logistics, I've amassed a comprehensive understanding of FOB terms and their implications in inventory management and accounting practices. My expertise in this field is substantiated by years of professional experience, academic knowledge, and practical application.
FOB, short for "Free on Board," is a crucial term in the realm of shipping and trade that delineates the responsibilities and obligations of both buyers and sellers in a transaction. When goods are designated as FOB destination, it implies that the seller is accountable for the transportation costs until the goods are delivered to the buyer. Consequently, the title of the goods remains with the seller until the carrier completes the delivery to the buyer.
Conversely, under FOB shipping point, the buyer bears the transportation costs, and the title of the goods is transferred when the carrier takes possession of the items from the seller's location. These distinctions have significant ramifications for inventory accounting.
Goods shipped under FOB terms are treated differently based on whether it's FOB destination or FOB shipping point. In FOB destination, the goods are part of the seller's inventory while in transit, whereas in FOB shipping point, they're considered part of the buyer's inventory during transit.
The choice between FOB destination and FOB shipping point often involves specifying a particular location, like "FOB Denver," indicating where the transfer of title to the goods occurs. In this scenario, until the goods reach a common carrier in Denver, the seller retains both title and risk of loss. This determination aligns with agency law, where the transfer of title is contingent upon whether the carrier, in possession of the goods, acts as an agent for the seller or the buyer.
To comprehend these concepts more thoroughly and delve into related topics, individuals can explore courses such as "Accounting for Freight," "Accounting for Inventory," and "Inventory Management" available on the AccountingTools platform. These courses offer comprehensive insights into the nuances of accounting practices concerning freight, inventory valuation, and efficient inventory management strategies, providing a well-rounded understanding of these fundamental principles in business operations.
FAQs
Under FOB destination terms, ownership of the inventory remains with the seller until the goods reach their final destination and are available for unloading at the buyer's location. Only at that point does ownership and responsibility for the inventory transfer from the seller to the buyer.
Who owns the inventory in FOB shipping point? ›
In a FOB shipping point agreement, ownership transfers from the seller to the buyer once the goods are delivered to the point of origin. At this shipping point, the buyer becomes the owner and bears the risk during transit. Alternatively, FOB destination places the delivery responsibility on the seller.
What is FOB in accounting terms? ›
FOB on an invoice stands for Free On Board or Freight On Board and refers to the point after which a business shipping products to a buyer is no longer responsible for the items. FOB is a common agreement for international shipping. FOB is always followed by a designation to indicate when the seller's obligation ends.
What does FOB mean in inventory? ›
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.
Who owns inventory when it is in transit under free on board FOB destination shipping? ›
Origin/Destination
“FOB origin” releases the seller from ownership and legal responsibility of the sold goods at that moment. For the designation “FOB [place of destination],” the seller retains legal ownership of the sold products until they reach their final delivery point.
What is the meaning of FOB in shipping terms? ›
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. Free on Board: Free on board indicates whether the seller or the buyer is liable for goods that are damaged or destroyed during shipping.
What does the FOB mean? ›
Key Takeaways
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 is the rule of FOB? ›
Under FOB, the seller has no obligation to contract for carriage. If the buyer requests it, the seller (at the buyer's risk and cost) must provide the buyer with any information known by the seller, including transport-related security requirements, that the buyer needs to arrange carriage.
How do you account for FOB shipping? ›
FOB accounting regulations: With an FOB shipping point, the buyer records the purchase at the point of sale, increasing their inventory. On the other hand, the seller records the sale at the time of shipment and within their accounts receivable.
What are FOB terms used to determine? ›
The FOB term is used with an identified physical location to determine 1) the responsibility and basis for payment of freight charges, and 2) the point at which title for the shipment passes from Seller to Buyer. The FOB location terms, Origin and Destination, may be qualified by modifiers.
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.
Who owns the inventory until it's sold? ›
With consignment inventory, the manufacturer, wholesaler or supplier retains ownership of the goods until the retailer sells them to customers. The retailer then pays the supplier for the goods it sells and returns any items that go unsold.
What is inventory ownership? ›
When the ownership of an item changes, payment is due and invoicing is initiated. In traditional, non-VMI business scenarios, the ownership of an item changes from the supplier to the customer after the customer has received the item from the supplier.
Who is legally responsible for arranging shipment under FOB term? ›
In an FOB destination transaction, the seller has important duties to ensure smooth and secure shipping. Arranging transportation and freight charges. The seller organizes the transportation of goods to the buyer's location and covers the freight costs.
Who owns the goods in transit under FOB shipping point? ›
Under FOB shipping point, the sale takes place when the goods reach the shipping point and therefore, the title passes to the buyer before the goods are shipped out. That means the buyer now gets ownership of the goods in transit.
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.
Who owns FOB shipping point vs 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.
Who owns the goods in transit under FOB destination? ›
Under FOB destination, the sale takes place only after the goods reach the buyer's destination and therefore, the title is still with the seller. That means ownership of the goods in transit still remains with the seller. Until the goods arrive at their destination, a sale or a purchase is not recorded.
What is the FOB shipping point in inventory? ›
If a shipment is sent FOB shipping point, the sale is considered complete as soon as the items are with the shipment carrier. That means the seller will record the sale immediately. At the same time, the buyer will record the goods as inventory, even though they're yet to physically receive them.
Who is the seller responsible for in FOB Incoterms? ›
Under Free on Board, the seller is responsible for delivering the goods to the port of departure, clearing it for export, and loading the goods on the vessel. Once the goods are on the vessel, the risk transfers from the seller to the buyer, who from that point is responsible for all costs thereafter.
