Consequently, the seller legally owns the goods and is responsible for the goods during the shipping process. The buyer takes responsibility for the transport cost and liability during transportation. “FOB Destination” means that the transfer completes at the buyer’s store and the seller is responsible for all of the freight costs and liability during transport.
Of this total, 95 million tons were export goods, 246 million tons were imported goods, and the remaining 544 million tons were moved by water within the United States. BTS projects the amount of cargo transport that will increase each year at around 1.4% until 2045,” According to data from the U.S. Department of Transportation’s Bureau of Transportation Statistics (BTS). With the advent of e-commerce, most commercial electronic transactions occur under the terms of "FOB shipping point" or "FCA shipping point". It’s important for the moment of sale to be accurately recorded for this reason, and also for entry into the company records. The term ‘pass over the rails’ was then dropped from the definitions available in the incoterm in the amendment passed in the year 2010.
FOB shipping point definition
To help facilitate these contracts and to set clear terms and conditions between the parties, the International Chamber of Commerce (ICC) has published a list of International Commercial Terms (Incoterms). Sometimes FOB is used in sales to retain commission by the outside sales representative. If the same seller issued a price quote of "$5000 FOB Miami", then the seller would cover shipping to the buyer's location. The phrase passing the ship's rail is no longer in use, having been dropped from the FOB Incoterm in the 2010 revision. When the ship's rail serves no practical purpose, such as in the case of roll-on/roll-off or container traffic, the FCA term is more appropriate to use. Designed for freelancers and small business owners, Debitoor invoicing software makes it quick and easy to issue professional invoices and manage your business finances.
What is the FOB shipping point?
Free on Board: Shipping Point
The FOB shipping point (or FOB origin) means that the buyer will receive the title for the goods they purchased once they've reached the shipping dock.
The shipping costs of the shipment are determined as soon as the buyer takes up the ownership as well as the responsibility of the goods being shipped. And this also impacts the accounting system of that particular company. Therefore, if goods are sent to a FOB shipping point, the sales process gets concluded as soon as the carriers exit the sellers loading dock. While shipping costs are determined by when the buyer takes ownership of a particular order of goods, a company’s accounting system is also impacted. If a shipment is sent FOB Shipping Point (the seller’s warehouse), then the sale is concluded as soon as the truck pulls out of the seller’s loading dock and is noted in the accounting system as such. The buyer assumes all risks and benefits of ownership as of the moment the shipment arrives at the shipping dock.
The Fine Print of FOB Shipping and Destination
FOB shipping point transfers the title of the shipment when the goods are placed at the shipping point. This is usually the seller’s loading dock, delivery truck, or postage office. As soon as the seller brings the goods to the point of shipment, the legal title of those goods passes to the buyer and the seller is no longer responsible for the goods during bookkeeping for startups delivery. If the carrier damages the package, the buyer can’t come after the seller because the title has already transferred. The seller’s only responsibility is to bring the package to the loading dock or delivery truck. The seller bears no responsibility for the goods during delivery and any damages, loss, or theft is handled by the buyer.
- In contrast to the FOB shipping point, the seller may bear the risk of loss and responsibility for transportation expenses while the goods are in transit.
- That allows the buyer to ensure they arrive in good condition and can be inspected upon receipt.
- When you are shipping loose cargo (ie, not a full container), for example, your goods must go through a Container Freight Station (CFS) to be consolidated into a container.
- When at the shipping point, the buyer now has an open accounts payable balance though it also should now carry the treadmill on their financial records.
- When shipping goods to a customer, FOB shipping point or FOB destination may be two primary options to choose from.
- To further clarify, let’s assume that Claire’s Comb Company in the US purchases a container of The Wonder Comb from a supplier based in China.
The supplier takes full responsibility for the computers and must either reimburse Company XYZ or reship the computers. It may be difficult to record delivery precisely when the goods have arrived at the shipping point. Due to constraints to an information system or delays in communication, it is more realistic that there is a slight timing difference between the legal arrangement and the accounting arrangement.
Insurance Claims Under FOB Shipping Point Terms
One thing I can say is that FOB shipping point is a great way for international trade. Since you always have the chance to choose which side of the trade you lie. The best thing about it is that you always have the chance to have full control of your shipping costs and liability of your goods. Well, FOB is one of the most commonly used terms for international trade.
- Incoterms apply to both international trade and domestic trade, as of the 2010 revision.
- Though in line with the accounting treatment mentioned above, it is worth explicitly calling out that FOB shipping point and FOB destination transfer ownership at different times.
- There may not be a line item on the bill for shipping and the shipper may require payment ahead of shipping.
- Specifically, each type of shipping can have the freight costs paid upfront (prepaid), or they may need to be collected after the products arrive to the buyer.
- FOB shipping point holds the seller liable for the goods until the goods begin their transport to the customer, while FOB destination holds the seller liable for the goods until they have reached the customer.
This is because this method offers some of the most effective terms for shipping costs. For that reason, it happens to be convenient for most shippers as well as receivers. It is in the buyer’s best interest to have the shipping terms be stated as FOB (the buyer’s location), or FOB Destination. First, the acronym FOB is a shipping term that stands for ‘free on board’. Free on board is a trade term that is used to determine or indicate whether the seller or the buyer is accountable for any damaged, lost, or destroyed package within the shipment process. With FOB destination, ownership of goods is transferred to the buyer at the buyer’s loading dock.