What Is a FOB Price in Shipping and Accounting?

Free On Board (FOB) is a widely used shipping term in commercial transactions. It is a contractual agreement between a seller and a buyer that defines the point at which responsibility for goods, including costs and risks, transfers from one party to the other. Understanding FOB is important for businesses as it impacts pricing, accounting practices, and liability throughout the supply chain.

Core Definition of FOB

Free On Board signifies that a seller fulfills their delivery obligation when goods are placed on board the vessel nominated by the buyer at the named port of shipment. This point marks the transfer of three elements: cost responsibility, risk of loss or damage, and title of the goods. When goods pass this point, the seller is no longer responsible for costs or liabilities.

This includes the cost of bringing the goods to the port and loading them onto the carrier. Once loaded, the buyer assumes ownership and becomes responsible for all subsequent costs and risks.

Understanding FOB Origin and FOB Destination

FOB terms are typically specified as either FOB Origin or FOB Destination, each carrying distinct implications for the buyer and seller. These designations dictate when the transfer of responsibility occurs, affecting who pays for shipping and who bears the risk of loss or damage during transit.

FOB Origin

For FOB Origin, also known as FOB Shipping Point, the transfer of responsibility for costs, risks, and title occurs at the seller’s shipping location. As soon as the goods are loaded onto the carrier at the seller’s factory or warehouse, the buyer assumes ownership. The buyer then becomes responsible for all shipping costs, including freight, insurance, and any potential customs duties, as well as the risk of loss or damage during transit to their facility. For accounting purposes, the buyer records the inventory on their balance sheet immediately upon dispatch, even before physically receiving the goods.

FOB Destination

Conversely, FOB Destination stipulates that the transfer of responsibility, including costs, risks, and title, occurs at the buyer’s specified destination. In this arrangement, the seller retains ownership and liability for the goods until they are delivered to the buyer’s designated location. The seller is responsible for all shipping costs, insurance, and the risk of loss or damage throughout the journey.

Practical Implications of FOB Terms

The chosen FOB term has practical implications for businesses. It directly influences a buyer’s total landed cost, which is the sum of all expenses incurred to get a product from the supplier to its final destination. Depending on the FOB term, costs such as freight, insurance, and import duties are factored into this calculation, impacting overall product profitability.

Understanding the risk transfer point is vital for proper risk management and securing appropriate cargo insurance. The party responsible for the goods during transit, as determined by the FOB term, is typically the one who needs to arrange for insurance coverage. For example, under FOB Origin, the buyer is responsible for insuring the goods during the main carriage.

In accounting and inventory management, FOB terms dictate when goods are recognized as “in transit” or “owned” by the buyer or seller. Under FOB Shipping Point, the seller recognizes the sale and reduces inventory when goods are shipped, while the buyer records the purchase and adds inventory to their books at that same time. For FOB Destination, the seller delays revenue recognition and inventory reduction until the goods arrive at the buyer’s location, impacting financial statements. FOB terms are specified on critical shipping documents such as commercial invoices and bills of lading, which are essential for legal, customs, and financial record-keeping purposes.