FOB shipping point is an abbreviation for “Free on Board Shipping Point” or “FOR Origin”. It is a shipping term which indicates that a buyer has to pay for goods to be delivered. What this simply means, is that as soon as the shipment leaves the warehouse, (or shipping dock), the title of the goods is transferred to the buyer. With this, the seller is to record the sale when the goods leave the warehouse.
With FOB shipping point, the buyer takes over the ownership of the goods en route to its warehouse, and thus, is to bear the delivery charges. If the goods get damaged in transit, the buyer is to file a claim with the insurance company.
FOB Shipping Point & FOB Destination
Both FOB shipping point and FOB destination have significance in accounting because they determine the following:
- When the purchase of goods as well as when the related liability occurs.
- When the sale of goods as well as when the related receivable occurs.
- If the seller or buyer pays the shipping costs.
FOB Shipping Point
In a situation where the seller of goods quotes a price, that is the FOB shipping point. Here, the sale takes place when the seller puts the goods on a common carrier at the seller’s dock. Thus, when the goods are being transported to the buyer, they are owned by the buyer, and the buyer is responsible for the shipping costs.
FOB Destination
In a situation where the seller of goods quotes a price, that is FOB destination. Here, the sale ensues when they are unloaded at the buyer’s destination. What this means is that the seller owns the goods while they are on the truck and the seller is responsible for the shipping costs.
Other Terms Encountered when Dealing with FOB Shipping Point
You are likely to come across these terms when dealing with the FOB shipping point, which you may have to define when developing your shipment process. Let’s outline them one after the other for a better understanding:
Bill of Lading
A bill of lading is used when a seller ships a third-party. A bill of lading acts as a legally binding document that the seller signs when delivering the goods to the carrier.
Here, the carrier also signs the bill of lading as the goods are being delivered to the buyer. This bill is a shipment receipt for the buyer and offers protection to the seller in the case of any dispute.
Liability Issues
A buyer is responsible for the goods during shipping, thus in the event of any damage or loss, the legal liability is the buyers. The buyer, therefore, is the one who will be required to file a claim to be reimbursed.
In the case of FOB destination, it is the seller who will have the liability if there is a damage or loss of goods before they arrive at the port of destination or buyer’s location. If this happens, the seller is under the obligation of providing the buyer with a new shipment.
Recognizing Revenue
According to the generally accepted accounting principles (GAAP), a business has no right to record revenue until the transfer of risks and rewards of the goods passes from the seller to the buyer. When it comes to the FOB shipping point, the sale is complete when the shipment is sent off. But in the case of FOB destination, the sale becomes complete when the goods get delivered and are in the buyer’s possession.
Note that the timing difference, from shipping terms, is typically just a few days and is not likely to affect periodic financial statements. Be it as it may, a CPA preparing GAAP financial statements will have to put in more scrutiny.
Since accountants often review shipping records and documentation during a “cutoff period”, which is usually around the end of the fiscal year right before and right after, it means that, if in your sales, there is FOB destination inventory which was shipped just before the cutoff (a day or two) or any inventory which is yet to be shipped, the business will not record the sale until the next fiscal year starts.
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