Also assume that the goods are on the truck until January 2, when they are unloaded at the buyer’s location. Therefore, the seller should continue to report these goods in its inventory until January 2. The seller will be responsible for the shipping costs, which will be an expense in January when the sale is reported. International commercial laws standardize the shipment and transportation of goods. These laws use specific terms outlined in detailed contracts to define delivery time, payment terms, and when the risk of loss shifts from the seller to the buyer.
For FOB Destination Point agreements, ownership transfers at the opposite end of the journey. Specifically, FOB indicates at which point the responsibility (and risk) of the shipped goods transfers from the seller to the buyer. FOB is part of the incoterms list published by the International Chamber of Commerce. These terms are used to standardize shipping and freight contracts and avoid lengthy negotiations by expressing contractual obligations in simple phrases. As an example of FOB shipping point accounting, suppose the value of the goods is again 5,000 and the freight expense from the shipping point of 600 is paid in cash by the buyer.
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He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. A variation on FOB what does fob stand for in accounting shipping point is were the seller for convenience prepays the shipping cost and recovers this from the buyer at a later date.
FOB Add-on Terms
- Actually entering the goods into inventory away from the buyer’s home base is difficult, so the contract may say the buyer receives and takes possession of the goods at the destination point.
- The entire shipping process, from carrier selection to route decisions, is in the seller’s hands.
- FOB Shipping Point means that the seller transfers ownership of the goods sold at the point of origin, when the items leave the seller’s warehouse.
- The fitness equipment manufacturer is responsible for ensuring the goods are delivered to the point of origin.
If you know from experience that, say, 7 percent of your accounts receivable won’t be paid, you set up an “allowance for doubtful accounts” entry in your records. Subtracting 7 percent of accounts receivable on your financial statements gives you a more realistic view of how much income to expect. FOB destination, on the other hand, transfers the ownership of the goods at the delivery point with the seller traditionally paying for the shipping expenses.
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Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. For information pertaining to the registration status of 11 Financial, please contact the state securities regulators for those states in which 11 Financial maintains a registration filing. It’s crucial to understand each Incoterm’s nuances and consult experts if needed to make an informed decision.
FOB and Incoterms
FOB accounting deals with the treatment of freight charges and how they are recorded in the accounting system. If the goods are damaged in transit, the customer should file a claim with the insurance carrier, since the customer has title to the goods during the period when the goods were damaged. This centuries-old shipping term has evolved into a critical concept of determining the reliability and ownership transfer. The internationalization of markets and technological progress in logistics, distribution, and communication means this affects almost every product consumers buy.
Actually entering the goods into inventory away from the buyer’s home base is difficult, so the contract may say the buyer receives and takes possession of the goods at the destination point. Usually the name of the actual port – Miami, Los Angeles, New York, Savannah – replaces “destination” or “shipping point” on the labels. Whether the shipping fees are prepaid or collect doesn’t affect who owns the goods. If the goods are sent FOB Origin Freight Prepaid, the buyer accepts the goods when they leave the seller’s dock, but the seller still pays the freight charges. Jeff pays the shipping costs and the parts are shipped FOB Ann’s Wiring, Inc. (also known as FOB shipping point).
