When goods are shipped FOB destination and the seller pays the freight charges?

If you’re confused by the terms FOB shipping or FOB destination, get in line. While the concepts are not difficult to master, the fine detail may put your head in a spin. What is the difference when comparing FOB shipping point vs FOB destination? The overarching idea is that free on board [FOB] is a shipping term indicating who [buyer or seller] is responsible for goods that are damaged, lost or destroyed during shipping. It indicates who “owns” the goods during transit, when that ownership changes, and who pays for the shipping, associated fees, and other freight charges. In international shipments, FOB refers to non-containerized sea freight or inland waterway transport. The term “free” is defined as the seller’s obligation to deliver the contracted goods to a named place, for goods transfer to a carrier.

Knowing the difference between FOB shipping and FOB destination can help you determine whether the shipping charges on your bill of lading are accurate or not. Errors on your bill of lading can often lead to shipping costs that you may not be responsible for, so with proper knowledge of these terms and shipping consulting, you can protect yourself from overspending.

Significance of FOB Shipping Point and FOB Destination

The terms FOB shipping point and FOB destination have significance in accounting because they determine the following:

When a sale of goods and the related receivable occur
When the purchase of goods and the related liability occur
Whether the seller or buyer pays the shipping costs

If the seller of goods quotes a price that is FOB shipping point, the sale takes place when the seller puts the goods on a common carrier at the seller's dock. Therefore, when the goods are being transported to the buyer, they are owned by the buyer and the buyer is responsible for the shipping costs.

If a seller of goods quotes a price that is FOB destination, the sale takes place when they are unloaded at the buyer's destination. This means that the seller owns the goods while they are on the truck and the seller is responsible for the shipping costs.

Example of FOB Shipping Point

Assume that a seller quoted a price of $900 FOB shipping point and the seller loaded the goods onto a common carrier on December 30. Also assume that the goods are in transit until they arrive at the buyer's location on January 2. On December 30, the seller should record a sale, an account receivable, and a reduction in its inventory.

The buyer should record the purchase, the account payable, and the increase in its inventory as of December 30 [the date that the purchase took place]. Since the goods on the truck belong to the buyer, the buyer should pay the shipping costs. These shipping costs will be an additional cost of the goods purchased.

Example of FOB Destination

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. On December 31, the goods were owned by the seller. Therefore, the seller should continue to report these goods in its inventory until January 2. The seller will be responsible for the shipping costs, which will be an expense in January when the sale is reported.

The buyer records the purchase, accounts payable, and the increase in inventory on January 2 when the buyer becomes the owner of the goods.

Introduction to FOB Destination

FOB destination stands for “Free on Board Destination.” FOB is one of the commonly used shipping terms, which means that the legal title to the goods remains with the Supplier until the goods reach the buyer’s location. The FOB destination is the location where the ownership changes hand from the seller to the buyer, and thus the actual sale of goods occurs. This is important for the accounts, as it dictates the period when the amounts need to be entered into the records.

The FOB destination outlines the key terms indicating whether the seller or buyer will incur the expense to get the goods to the destination. With goods at the FOB destination, the title to the goods usually passes from the supplier to the buyer. This means that goods are reported as inventory by the seller when they are in transit since, technically, the sale does not occur until the goods reach the destination. FOB destination shipping point is the alternative term for recording the sale in the records, which indicates that the sale is recorded when the seller ships the goods.

FOB Destination in Accounting

The point of FOB destination shipping is to transfer the title of the goods to the buyer from a seller as soon as goods have arrived at the buyer’s location.
In accounting, only when goods have arrived at the shipping destination should they be reported as a sale and an increase in accounts receivable by the seller and as a purchase and inventory by the buyer.
When a sale is made, a company must record sales for the merchandiser and manufacturer. The term FOB destination shipping tells that the sale will officially occur when it arrives at the buyer’s receiving dock.
The buyer will record an increase in its inventory at the same time as the buyer is undertaking the rewards of ownership and the associated risks, which occur at the point of arrival at its shipping dock.

Freight Costs

The FOB Destination shipping term also applies to the cost of shipping and the responsibility for the goods, which means that the supplier is the responsible party for the goods and must undertake the delivery fee and the cost of any damages.

There are mainly four variations of FOB destination shipping terms, which are mentioned below:

Freight prepaid and allowed: In this case, the seller bears and pays the freight charges and is the owner of the goods while they are in transit. Transfer of title takes place only when the goods reach the buyer’s location.
Freight prepaid and added: In this case, freight charges are paid by the seller, but the same is billed to the customer. The seller owns the goods in the case also while they are in transit. Transfer of title takes place only when the goods reach the buyer’s location.
Freight collect: In this case, the buyer pays the freight charges at the time of receipt, but the supplier still is the one who owns the goods while they are in transit.
Freight collect and allowed: In this case, the buyer pays for the freight costs but deducts the same from the final supplier’s invoice. Thus, the seller still owns the goods while they are in transit.

Any type of FOB terms will be superseded if a buyer elects to override those terms with a customer-arranged pickup, where a buyer arranges to have goods picked up at its own risk from the seller’s location and takes responsibility for the goods from that point. In this situation, the billing staff is required to be aware of the new delivery terms so that it does not bill freight charges to the buyer.

If the goods are damaged during transit, the seller should file an insurance claim with the insurance carrier as the seller possesses the title to the goods when the goods were damaged.

In most cases, without a FOB agreement, the shipper/seller will probably record a sale as soon as goods leave their shipping dock, irrespective of the terms of delivery. Thus, the real impact of FOB destination shipping terms is the determination of who bears the risk during transit and pays for the freight expense.

Example #1

Bloemen Alle is a Russian businessman engaged in the export of carpets. It received an order worth $5,000 from a Dubai-based customer on 10 October 2013, and the supplier was asked to ship the carpets by 25 October 2012 under the FOB agreement. Bloemen Alle shipped the flowers on 21 October 2012. The shipment cost is $400.

When should Bloemen Alle record the sale? When should the Dubai-based customer record the sale, and at what cost?

Since the shipment is a FOB shipping point, the delivery is made at the moment the carpets are shipped. Therefore, Bloemen Alle should record the sale of $5,000 on 21 October 2012.

The Dubai-based customer should record the purchase on 21 October 2012 too. In addition, it should record the inventory of $5,400 [$5,000 purchase price plus $400 shipment cost]. It is because, under a FOB destination shipping point, the shipment cost is normally incurred by the buyer.

Example #2

XYZ’s corporation orders 100 computers from Dell to replace its current point of sale systems. XYZ orders them with FOB destination shipping terms. After receiving the order, Dell packages up the computers and sends the packed computers to the delivery department, where they are loaded onto a ship. Halfway to its destination, the ship crashes, and the computers got destroyed. Who is responsible?

Since the computers were shipped, Dell [the seller] is responsible for the damage during the shipping process. The goods were never delivered to XYZ, so Dell, in this case, is fully responsible for the computer damages and would have to file a claim with its insurance company.

Who pays for freight on FOB destination?

For FOB destination, the seller assumes all costs and fees until the goods reach their destination. Upon entry into the port, all fees—including duties, customs, taxes, and other fees—are borne by the buyer.

What happens when something is delivered FOB destination?

FOB destination is a contraction of the term "Free on Board Destination." The term means that the buyer takes delivery of goods being shipped to it by a supplier once the goods arrive at the buyer's receiving dock.

When the seller pays the cost and freight?

It means that the seller must pay the costs and freight necessary to bring the goods to a named port of destination and must also procure marine insurance against the buyer's risk or loss to the goods during the carriage. Description: C&F stands for cost and freight and is always stated as C&F port of importation.

What happens if goods in transit are shipped FOB destination?

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. These goods are part of the seller's inventory while in transit.