Instead, use FCA (Free Carrier), CPT (Carriage Paid To), and CIP (Carriage and Insurance Paid To), which are the correct alternatives as they are meant for containerised freight. Assume that a seller quoted a price of $900 FOB shipping point and the seller loaded the goods onto a common carrier on December 30. Also assume that the goods are in transit until they arrive at the buyer’s location on January 2. On December 30, the seller should record a sale, an account receivable, and a reduction in its inventory. Read all contracts carefully, calculate potential costs, purchase insurance—and consider negotiating additional terms in your shipping or sales agreement to protect against losses. Unless there are additional terms in the shipping agreement, buyers handle any freight charges for FOB shipping point goods from when the shipping vessel departs to when they receive their purchase.

Cost Savings for Buyers/Sellers

Buyers generally consider FOB agreements to be cheaper and more cost-effective. That’s because they have more control over choosing shippers and insurance limits. Depending on the agreement with your supplier, your goods may be considered delivered at any point between the port of destination and your final delivery address.

Understanding Shipping Point vs FOB Shipping Point

This means that as soon as the seller loads the goods onto the freight truck, they are legally owned by the buyer. If anything happens to the goods in transit, the buyer is responsible for them—not the seller. As the shipping costs have already been paid, the amount is owed fob shipping point to the seller. This means that the buyer may have to assume liability for any extra costs, such as customs fees, and make payment once it reaches the port of destination. The transport carrier turns the transfer documentation for the goods over to the buyer upon payment.

What’s the Difference Between FOB Shipping Point and FOB Destination?

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. The term FOB shipping point is a contraction of the term Free on Board Shipping Point.

Additional Shipping Terms

At this shipping point, the buyer becomes the owner and bears the risk during transit. The choice between FOB Origin and FOB destination depends on the specific needs of both parties. Since Dara Inc. has experience managing international shipping or wants to save on transport costs, FOB Origin, they decided to go forward this way. However, if the seller wants to minimize risk and offer a complete service (including delivery), FOB Destination would be a better option.

• The term “freight on board” originated from the days of sailing ships when goods were “passed over the rail by hand,” as defined in Incoterm.
• CIF is commonly used for large deliveries, including oversized goods, that are shipped by sea.
• They are meant to make foreign trade seamless with clearly defined roles for buyers and sellers in the global market.
• As such, FOB shipping means that the supplier retains ownership and responsibility for the goods until they are loaded ‘on board’ a shipping vessel.
• It requires the supplier to pay for the delivery of your goods up until the named port of shipment, but not for getting the goods aboard the ship.

Essentially, when the seller delivers the goods and ships them, they’re taking care of all the transportation costs up to the final destination. This often involves specifying in the shipping documents that freight is prepaid. Indicating “FOB port” means that the seller pays for transportation of the goods to the port of shipment, plus loading costs. The buyer pays the cost of marine freight transport, insurance, unloading, and transportation from the arrival port to the final destination. The passing of risks occurs when the goods are loaded on board at the port of shipment. Responsibility for the goods is with the seller until the goods are loaded on board the ship.

FOB Destination Accounting

• When the goods reach the buyer’s location, the title of ownership is shifted from the seller to the buyer.
• In addition, the customer should insure the goods during the in-transit period.
• FOB is important because it has shipping liability and accounting implications.
• Assume a fitness equipment manufacturer receives an order for 20 treadmills from a newly opened gym located across the country.
• Understanding these variations can profoundly affect your supply chain and your ability to manage shipping costs effectively.

The selection of an appropriate Incoterm, including FOB, depends on the specifics of the trade deal. Throughout the transportation process, the seller remains the legal owner of the goods. Only once the goods have safely reached their intended destination does the ownership transfer from the seller to the buyer.

With an FOB shipping point (or FOB origin), the sale of the goods is made as soon as the seller ships them out. In essence, this means the sale is finalized the moment the shipping carrier takes the goods away. So, the buyer pays for the goods before they are received and usually bears the cost of shipping and liabilities of transportations, including loss, damage, or theft. Freight Collect is often the choice for businesses that prefer to have full control over every aspect of the shipping process, from selecting shipping terms to managing freight charges. However, this method does place the onus of risk and responsibility firmly on the buyer’s shoulders, from the point of FOB designation to the goods’ arrival at the buyer’s location. A free on board contract is much cheaper than a cost, insurance, and freight agreement.

Free on board, also referred to as freight on board, only applies to shipments made via waterways and doesn’t apply to goods transported by vehicle or air. With an accrual accounting system, income and expenses are reported as soon as cash is earned or debt is incurred. So, an FOB transaction could muddy your financial picture as you make a quarterly financial statement. In the case of the FOB shipping point, the seller would record $50,000 as coming in, even though they haven’t been paid yet. So, there’s a disparity in the amount of money you’ve recorded as having and how much cash is actually there.