This accounting treatment is important because adding costs to inventory means the buyer does not immediately expense the costs and this delay in recognizing the cost as an expense affects net income. Since FOB shipping point fob meaning transfers the title of the shipment of goods when the goods are placed at the shipping point, the legal title of those goods is transferred to the buyer. Therefore, the seller is not responsible for the goods during delivery.

  1. FOB Destination is different to FOB Shipping Point where the buyer is responsible for the shipping and transportation instead of the seller.
  2. First developed in 1936, the terms more than 45 million companies in more than 100 countries.
  3. Basically, the seller can mark the goods as “complete” in their books and the buyer handles the rest.
  4. With FOB Destination, sellers maintain control over goods until they are delivered to the agreed-upon destination.
  5. Assume the computers were never delivered to Company XYZ’s destination, for whatever reason.

For FOB destination, the seller retains ownership of the goods and is responsible for replacing damaged or lost items until the point where the goods have reached their final destination. The vendor-client transaction defines the FOB terms in the purchase order. Incoterms are international commercial terms published by the International Chamber of Commerce. They are meant to make foreign trade seamless with clearly defined roles for buyers and sellers in the global market. First developed in 1936, the terms more than 45 million companies in more than 100 countries. Buyers generally consider FOB agreements to be cheaper and more cost-effective.

Incoterms for all transport modes

Properly applying FOB terms ensures accurate reporting of sales revenue and inventory values. Accurate financial reporting is essential under various FOB terms to reflect the true financial position of a company. Misinterpretation or misapplication of these terms can lead to incorrect revenue recognition or inventory valuation, affecting profitability.

What is an example of FOB shipping point?

Sellers must cover shipping fees, insurance, and other expenses until the goods are handed to the buyer at the destination. FOB Destination signifies the seller retaining responsibility for goods until they reach the buyer’s designated location. At this stage, ownership and risk remain with the seller until delivery is completed successfully.

FOB Origin vs Destination

Some receiving docks will refuse delivery of obviously damaged goods, rather than accept with a damage notation for future claim against the carrier. However, a shipment designated FOB Origin technically belongs to the buyer/consignee at the time that it is shipped. So, the consignee would be refusing delivery of goods it legally owns and bears the risk for. The seller has no legal reason to accept those goods back and the return shipment could possibly result in additional damages. Buyers have the ability to choose their own freight forwarder, so they have more access to information about their freight transport and timeline. They can also more easily track their packages and handle their own disputes with customs or freight carriers.

How Does Shipping Under FOB Work in China?

On the day your cargo is scheduled to leave, the seller’s warehouse and your logistics company will arrange a truck to collect it. Be sure to ask your forwarder if they can communicate with the supplier or prefer you to organize all communication. In contrast, we recognize that having our team in China means we can better coordinate directly with suppliers and be prepared to react in the event of any delays or issues before the shipping day. If you are shipping a full container load (FCL), the truck will carry the container to the seller’s warehouse, and the seller will load the cargo directly into the container. FOB allows the buyer to select their freight forwarder for the entire shipment. Instead of relying on the supplier for part or all of the freighting process.