In today’s world, commercial activities involving shipment of goods are guided by a set of widely accepted terms. One such term is FOB shipping point, which is short for ‘Freight on Board shipping point’.
FOB shipping point is a shipping term used to describe a system where the buyer takes responsibility for goods during shipment. In other words, the buyer takes responsibility for damage or loss of goods during shipment. The buyer is also obligated to take delivery of the goods, and pay the associated delivery fees.
As ownership passes to the owner during shipment, the seller must record a sale once the goods leave the warehouse. On the other hand, receipt is recorded only when the goods arrive at the buyer’s facility.
If goods get damaged or lost during transit, it is on the buyer, and not the seller, to file an insurance claim. This is because FOB shipping point stipulates that goods are the buyer’s property once in shipment.
Here’s an example of FOB shipping point:
Let’s assume XYZ Incorporated, a US sportswear retailer, enters an agreement with a supplier in Germany, and signs a FOB shipping point agreement. The supplier is poised to record the sale as completed while the goods leave its warehouse in Germany.
Should the goods suffer damage in transit, XYZ Inc. cannot ask its supplier to pay compensation. Rather, the company must file a claim with its insurer who will reimburse it for the loss. The supplier is only responsible for sending the sportswear to the shipping company.
It is common to confuse ‘FOB shipping point’ with ‘FOB destination’. However, they do not mean the same thing. Under FOB shipping point, ownership of goods passes to the owner during shipment. However, FOB destination suggests that ownership passes to the owner only when they arrive at the buyer’s location.
FOB destination means the seller remains responsible for the product until it reaches the buyer. If the goods suffer damage in transit, the seller will have to reimburse the buyer for the loss or damages.
Another difference between FOB shipping point and FOB destination is documentation of sale and delivery of goods. In FOB shipping point, the seller must record the sale once goods are sent out for shipment. The buyer must also record the delivery at the same time.
Conversely, FOB destination means that the seller must record the sale only when goods reach the buyer’s location. Similarly, the buyer only confirms delivery only if goods arrive in perfect condition.
Also, FOB shipping point and FOB destination differ in how they share costs between buyer and seller. Under an FOB shipping point agreement, the seller only pays for the cost of delivering the goods to the shipping dock. If the goods are on the ship, the buyer covers all costs associated with the shipment — taxes, customs charges, and other expenses.
An FOB destination agreement stipulates that the seller must cover all shipment-related costs until the goods reach the buyer’s preferred destination port. Afterwards, the buyer has to bear costs for the goods delivered to the port.
In an FOB shipping point arrangement, the seller is only responsible for transporting the goods to the port of origin. The seller covers all costs incurred during the transportation of the goods to the port of origin.
However, the seller ceases to bear costs of transporting goods when the goods arrive for shipment. The buyer must now pay for the freight of goods from the port of origin to the port of destination.
Thus, all freight-related costs are assumed by the buyer including:
Earlier, we noted that the accounting process for FOB shipping point is quite different from that of FOB destination. Now, we’ll fully go into how the accounting takes place under an FOB shipping point agreement.
For FOB shipping points, the seller will record the sale and reduce its inventory when goods are sent out. The company’s accountant will increase the accounts receivable, and notify the buyer of the pending payment.
On the other hand, the buyer must record the purchase and increase its inventory. The buyer’s accountancy department will also increase its accounts payable, and send confirmation of the delivery to the seller.
However, there are exceptions to stated accounting principles surrounding the FOB shipping agreement. Because it’s difficult to confirm delivery at the shipping point, many buyers opt to record receipt only if goods arrive at their dock.
So, in most cases, the seller will record the sale when goods leave its warehouse, while the buyer records receipt when goods arrive at its location. Such exceptions are usually made in the interest of practical considerations.
Freight on Board (FOB) is a term that determines who bears responsibility for goods. FOB also includes statements on who pays for shipping, and other costs associated with transporting goods to their final destination.
While FOB includes shipping, the entity that bears shipping costs will vary depending on the terms of sale. If the FOB is marked ‘FOB shipping point,’ the buyer will have to pay for shipping the goods. Should the FOB agreement be marked ‘FOB destination,’ the seller will have to bear all costs of shipping goods to the buyer’s preferred location.
It is necessary to have a defined FOB agreement in place before you embark on transactions involving shipment of goods. That way, there is little dispute as to who must cover costs of shipping.
Freight on Board (FOB) and Cost, Insurance and Freight (CIF) are two widely accepted terms that guide shipment of goods from seller to buyer. While they concern the same activity — shipping — they have many differences which we’ll evaluate subsequently.
Under CIF delivery terms, ownership of goods lies with the seller until the said goods are delivered to the buyer. The seller must bear all risks and insurance costs associated with the shipment until the buyer receives it.
CIF indicates that the seller must provide necessary customs documents and pay for insurance and shipping. The seller is also responsible for ensuring the goods get to the buyer’s port of destination in perfect condition.
In comparison, FOB states that the buyer assumes ownership of the goods at the port of origin. Once the shipper loads the shipment on the carrier, the buyer has to bear all risks and insurance costs until the goods arrive.
Under FOB delivery terms, the seller loads the goods on the freight career chosen by the buyer. Immediately the freighter picks up the goods, the title of ownership passes to the buyer. Then the buyer has to pay for shipping and insurance costs.
Both FOB and CIF have their own advantages and disadvantages, so it’s hard to determine which is better. What works best for you depends on your individual circumstances.
Research shows that CIF might be a better option for those who are inexperienced when it comes to buying goods in international trade. Under CIF, the seller, who likely has more experience, must handle transportation of goods to the port, loading of goods on the ship, and payment for shipping.
CIF is also great for traders who only have small amounts of cargo to transport. This way, they can take advantage of deals negotiated between the seller and the freight company.
Conversely, FOB is better for those experienced in international trade. This is because they already have their own preferred logistics companies they use for shipping.
FOB is somewhat good for buyers because they can negotiate discounts with freighters. In CIF, the buyer must use freight services that the seller chooses. And this may be expensive if the seller plans to make profit on the freighting service.
In summary, choose CIF or FOB depending on what your situation calls for. Still, most information suggests it is better to use CIF when selling and FOB when selling.
FOB is a shipping term that indicates the party responsible for paying transportation charges on goods. It also refers to the point where the title of ownership on goods passes from the seller to the buyer.
If the FOB agreement says ‘FOB destination,’ it means the seller must bear all costs of shipping goods to the buyer’s destination. If, however, the FOB agreement says ‘FOB shipping point’ or ‘FOB origin,’ the buyer has to pay to ship the goods from the port of origin to the final destination.