What are the differences between a free onboard shipping point and a free onboard destination?
In order to standardize rules and regulations surrounding the shipment and transportation of goods, international commercial laws have been in place for decades. In international trade situations, special contracts are necessary because laws differ among different countries and international trade is complicated.Both parties must agree on the delivery time and place as well as the payment terms in these international contracts. Depending on the contract, the risk of loss shifts from the seller to the buyer and who pays for freight and insurance.The International Chamber of Commerce (ICC) publishes several international commercial terms (Incoterms) including free on board (FOB) shipping point and free on board (FOB) destination.The point at which title transfers from the seller to the buyer is called the FOB shipping point or FOB destination. If goods are lost or damaged during shipping, the distinction is important for determining who is responsible. There is a significant difference between the two contracts in the timing of the transfer of title.The term free on board, also known as freight on board, only refers to shipments made on waterways, not by vehicle or by air.
FOB Shipping Point (Free on Board)
As soon as goods are placed on a delivery vehicle, the title and responsibility of the goods are transferred from the seller to the buyer, also known as FOB origin.Once the goods are placed at the shipping point, the legal title to those goods is transferred to the buyer since FOB shipping point transfers the title of the shipment of goods. As a result, the seller is not responsible for the goods during delivery. As responsibility changes hands at the seller’s shipping dock, FOB shipping point is another limitation or condition to FOB.Let’s say Company ABC in the United States buys electronic devices from its supplier in China and signs a FOB shipping point agreement. Company ABC cannot ask the supplier to reimburse it for losses or damages if the designated carrier damages the package during delivery. Electronic devices are only brought to the carrier by the supplier.
FOB (Free on Board)
In contrast, with FOB destination, title is transferred at the buyer’s loading dock, post office box, or office building. After the goods are delivered to the buyer’s specified location, ownership of the goods transfers from the seller to the buyer. Consequently, the seller legally owns the goods and is responsible for them during shipping.Inventory costs include all costs associated with preparing inventory for sale, so shipping terms affect inventory costs. In this case, 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.
The key differences
Guidance for Accounting
The primary difference between these two terms is how they are accounted for. As soon as the goods are loaded onto the ship for transport, the company can record an increase in inventory. At the same time, the seller records the sale.
FOB destination accounting rules change. Once the goods arrive at the receiving dock, the seller completes the sale in its records. The buyer records the increase in inventory at that time. For FOB shipping point transactions, accounting entries are generally made earlier than for FOB destination transactions.
Despite the accounting treatment described above, it is worth explicitly mentioning that FOB shipping point and FOB destination transfer ownership at different times. Once goods have been delivered to the point of origin, ownership is transferred from the seller to the buyer. As soon as the goods reach this shipping point, the buyer becomes the owner and is responsible for the goods during transit.
As an alternative, FOB destinations place the burden of delivery on the seller. Ownership of the goods remains with the seller until they are delivered. Ownership passes to the buyer upon delivery.
The division of costs
Costs are also divided differently. With FOB shipping point, the seller assumes transportation costs and fees until the goods reach the port of origin.
All costs associated with transport, customs, taxes, and other fees must be paid by the buyer once the goods are on the ship. Until the goods reach their destination, the seller assumes all costs and fees. The buyer is responsible for all fees upon entry into the port, including duties, customs, taxes, and other fees.