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FOB conditions may affect inventory, shipping, and insurance expenses, regardless of whether the transfer of products happens domestically or internationally. The buyer and seller’s bill of sale or other agreement determines ownership; FOB status only indicates which party is responsible for the cargo from beginning to end. On the other hand, the accounting rules are different when operating under FOB destination. Here, neither the buyer nor the seller can claim the difference in inventory until the goods have reached their final destination. Here, we will look at the difference between Free Onboard (FOB) shipping point and free onboard destination as they are vital incoterms for shippers and important to understand.
- In general, the accounting entries are often performed earlier for an FOB shipping point transaction than an FOB destination transaction.
- The most important reason you should understand FOB terms is that they set out who is responsible for certain costs and who must take action if the products are harmed or lost during the shipping process.
- When a shipment is “FOB” to the seller’s location, as soon as that shipment leaves the seller’s premises or storage warehouse, the seller can mark and record that sale as being complete.
- The FOB shipping point price does not generally include shipping, as that is typically paid by the seller.
- Fuel charges, insurance, customs tax, and all other shipping fees are also under the buyer’s financial responsibility.
- The buyer is responsible, even though the watches were damaged before arriving on U.S. soil.
It is much easier to determine when title transfers by referring to the agreed upon terms and conditions of the transaction; typically, title passes with risk of loss. The transfer of title may occur at a different time (or event) than the FOB shipping term. The transfer of title is the element of revenue that determines who owns the goods and the applicable value. Ownership of a cargo is independent of Incoterms, which relate to delivery and risk.
The Fine Print of FOB Shipping and Destination
However, currently, it can be used for just about any mode of transit shipments. Also, it is important to note that although the word free is used in the FOB shipping, it actually doesn’t negate the shipping cost for the goods in transit. The word is simply used to refer to whoever has the liability and obligation to take care of the shipment in transit.
In that case, it was the term used to generally refer to the goods shipped by sea since it was the major transportation method for shipping cargo from abroad. FOB shipping and FOB destination are the main categories to determine when the title of the goods is transferred from the seller to the buyer, who pays the fees bookkeeping for startups and who is liable. But there are some finer points to know, and you may see these terms on your invoice or bill of lading. This is also the moment that the supplier should record a sale since they’re taking ownership at the receiving dock. It’s common for high-value goods to be sent via FOB destination designation.
FOB Price: What is the Difference Between FOB and other sea shipping incoterms?
There may not be a line item on the bill for shipping and the shipper may require payment ahead of shipping. It’s always good to know whether shipping is already factored into overall costs, or whether it’s a line item when inquiring about discounted shipping rates. Inventory costs are expensive and include not only the cost of goods, but the fees to prepare inventory for sale. The amount of inventory and cost of goods on the books changes as well, depending on where the goods are and the FOB status.