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Free on Board FOB Definition, Types, Contracts, Pros & Cons

what is fob in accounting

If you have the background to do it, FOB may be a better option since it offers you more control at a potentially lower cost. CIF is commonly used for large deliveries, including oversized goods, that are shipped by sea. The seller also obtains the necessary documentation, licenses, and inspections that may be required.

Types of FOB Contracts

what is fob in accounting

Sometimes FOB is used in sales to retain commission by the outside sales representative. International shipments typically use „FOB” as defined by the Incoterms standards, where it always stands for „Free On Board”. Domestic shipments within the United States or Canada often use a different meaning, specific to North America, which is inconsistent with the Incoterms standards. If the same seller issued a price quote of „$5000 FOB Miami”, then the seller would cover shipping to the buyer’s location.

What Is Cheaper, FOB or CIF?

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. In addition, the customer should insure the goods during the in-transit period. Now assume that a seller quoted $975 FOB destination and the seller loaded the goods onto a common carrier on December 30. Also assume that the goods are on the truck until January 2, when they are unloaded at the buyer’s location.

FOB Destination Point

what is fob in accounting

Under FOB destination, freight prepaid and allowed terms, the seller pays and bears the freight charges and owns the goods while they are in transit. Cost, insurance and freight (CIF) is another commonly used INCOTERM agreement. fob shipping point Free alongside ship (FAS) cites that the delivery vessel will transfer cargo from a vessel next to the buyer’s vessel whereas free on board (FOB) standards require that the seller deliver directly to the buyer’s vessel.

what is fob in accounting

What is the significance of FOB Shipping Point and FOB Destination?

what is fob in accounting

This means that the buyer may have to assume liability for any extra costs, such as customs fees, and make payment once it reaches the port of destination. The transport carrier turns the transfer documentation for the goods over to the buyer upon payment. The main difference is that under CIF contracts, the seller is responsible for the risks and costs of transportation, whereas FOB contracts assign these costs to the buyer.

what is fob in accounting

FOB Freight Prepaid and Added

  • Although FOB shipping point and FOB destination are among the most common terms, other agreements vary from these two.
  • Since the seller has more control, they may opt for a preferred shipper who may be more costly.
  • However, this comes with more flexibility over logistical details for the buyer’s needs and potentially lower costs since they can negotiate directly with shipping companies.
  • Free on Board (FOB) is a shipping designation in international trade, indicating the point at which responsibilities and risks of goods transfer from seller to buyer.
  • Before negotiating, make sure you understand the consequences of using FOB shipping point or FOB destination for your purchase—in terms of costs, risks, and responsibilities.
  • So, if you’re buying or selling globally, review the laws of the country you’re shipping from.

They also outline the responsibilities of buyers to sellers, as well as sellers to buyers. While FOB destination may seem like a good deal to any buyer as they don’t have to worry about the costs and liability of the goods in transport, it has its disadvantages, too. For example, if the seller is responsible for the transport, the buyer also loses a bit of control over timing.

With CIF, the seller handles all the documentation for exporting the goods, and the buyer takes over once it has reached its port. The buyer is thus responsible for clearing the cargo once it arrives and paying any import duties and charges. Since the seller has more control, they may opt for a preferred shipper who may be more costly.

Why Is FOB Important to Small Business Accounting?

  • In this situation, the billing staff must be aware of the new delivery terms, so that it does not bill freight to the customer.
  • As an example of FOB destination accounting, suppose the value of the goods is 5,000 and the freight expense to the buyers destination of 600 is paid in cash by the seller.
  • Since the ownership of the goods doesn’t transfer to the buyer until the goods arrive at the delivery point, the risk of loss during transit is on the seller.
  • Generally, FOB is generally specified in a sales agreement and is accounted for under inventory costs.

How to Factor in Inventory Costs

  • Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism.
  • Instead, the manufacturer retains ownership of the equipment until it’s delivered to the buyer.
  • International shipments typically use „FOB” as defined by the Incoterms standards, where it always stands for „Free On Board”.
  • However you’re getting your goods from the destination port to their final destination, that cost is also on you.
  • Incoterms (International Commercial Terms) are a set of internationally recognized standards that define the roles of buyers and sellers in the transfer of goods in international and domestic trade.