FOB Destination (Free on Board)

FOB Destination orFree on Board Destination is the term that implies that the ownership or title of the goods supplied by the supplier from a foreign country is transferred to the purchaser of the goods only when the goods arrive at the purchaser’s loading dock or more specifically when the goods reach to the specified location of the buyer.

Free on Board 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. As a result, the responsibility for any damage or harm happening to the products while transit remains with the supplier until they reach the buyers.

The FOB destination is where the ownership changes hands from the seller to the buyer, and the actual sale of goods occurs. It is vital for the accounts, as it dictates the period when the amounts need to enter into the records. It outlines the key terms indicating whether the seller or buyer will incur the expense to get the goods to the destination.

The title of the goods usually passes from the supplier to the buyer. It 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 shipping point is the alternative term for recording the sale in the records. It indicates that the sale is recorded when the seller ships the goods.

The FOB destination point is to transfer the title of the goods to the buyer from the seller as soon these arrive at the buyer's location.

In accounting, only when goods arrive at the shipping destination, they should be reported as a sale and increase in accounts receivable by the seller and as a purchase and inventory by the buyer.

The company must record sales for the merchandiser and manufacturer when a sale is made. The term tells us that the sale will officially occur when it arrives at the buyer's receiving dock.

When the FOB destination journal entry is made, the buyer will record an increase in its inventory simultaneously as the buyer is undertaking the rewards of ownership and the associated risks, which occur at the FOB destination point of arrival at its shipping dock.

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 as below:

1. Free on Board destination, 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.
2. Free on Board destination, freight prepaid and added: In this case, freight charges are payable by the seller, but the billing is to the customer. The seller also owns the goods in the case while they are in transit. Transfer of title takes place only when the goods reach the buyer's location.
3. Free on Board destination, freight collects: 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.
4. Free on Board destination, freight collects and allowed: In this case, the buyer pays for the freight costs but deducts the same from the final supplier's invoice. The seller still owns the goods while they are in transit.

Any FOB destination shipping terms will supersede if a buyer overrides those terms with the 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 must 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. The seller possesses the title to the goods during the period when the goods were damaged.

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

Let us consider the following examples to understand the concept even better:

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 at the FOB shipping point, the delivery is made when the carpets are shipped. 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. It should record the inventory of $5,400 ($5,000 purchase price plus $400 shipment cost). It is because, under the FOB shipping point, the buyer usually incurred the shipment cost.

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 the ship. Halfway to its destination, the ship crashed, and the computers got destroyed. Who is responsible?

Since the computers were shipped to the FOB destination, 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 liable for the computer damages and would have to file a claim with its insurance company.

When two parties sign a FOB shipping contract, the two common terms that they usually come across are FOB destination and FOB shipping point (also known as FOB origin). The term differs from each other in various aspects, and hence, the suppliers and buyers must know what these terms imply when used in the agreements.

Let us look at a few differences between FOB shipping point or FOB origin and FOB destination in brief:

• While the latter gives the right to ownership of products and services as soon as they leave the shipping point of the supplier, the former does not let suppliers allow the buyers any right to the goods and services until they reach their destination.
• Under the FOB shipping point, as the buyers acquire all the rights to the goods and items as soon as they leave the shipping point of the supplier, any damage or harm happening to the items while transit becomes the sole responsibility of buyers. On the contrary, under FOB destination, the suppliers remain responsible for any damage or harm to the products being transported until they reach the buyers.

This article has been a guide to FOB Destination and its Meaning. Here, we explain vs FOB shipping point, terms, examples, and accounting. You may also learn more about accounting from the following articles –

• Cost of Goods Sold Definition
• Revenue vs Sales
• Unearned Revenue Definition
• Bonus Depreciation