FOB | Free on Board

FOB is an acronym for Free on Board, and indicates whether the supplier or the customer will pay shipping expenses. Also, the type of FOB shows which party takes legal responsibility for the goods being shipped, and at what point during transport that responsibility is transferred. There are two types of FOB, which are FOB destination and FOB shipping point. The type of FOB to be used is typically designated in a customer's purchase order, and is also stated on the supplier's invoice to the customer.

FOB Destination

FOB destination means that the customer takes delivery of goods being shipped to it by a supplier once the goods arrive at the customer's receiving dock. There are three variations on FOB Destination terms, which are:

  • FOB Destination, Freight Prepaid. The supplier pays the freight charges and owns the goods while they are in transit.
  • FOB Destination, Freight Collect. The customer pays the freight charges, though the supplier still owns the goods while they are in transit.
  • FOB Destination, Freight Collect and Allowed. The customer pays for the freight costs, but deducts the cost from the supplier's invoice. The supplier still owns the goods while they are in transit.

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.

Related Courses

Accounting for Inventory 
How to Audit Inventory