When a supplier (or seller) of a product commits to a sale, they enter into a contract with a buyer. Depending on the terms of the sale contract, either the seller or the buyer may be responsible for the costs to ship the product. This sale term can be referred to as FOB shipment, or free on board shipment. There are two types of FOB shipment terms: FOB shipping point and FOB destination. Depending on what terms were outlined during the initial product sale, there are a few key differences that may affect the seller or buyer, respectively.
In this article, you will learn what FOB shipping point and FOB destination mean in regard to the sale of goods, as well as the key differences that set these two terms apart.
What is FOB Shipping?
FOB shipping is also called FOB shipping point or FOB origin. As soon as the goods arrive at the transportation site, and are placed on a delivery vehicle, or at the shipping dock, the buyer is liable for any losses or damage that occur after. The buyer would then record the sale, and consider their inventory increased.
With FOB shipping point, the buyer pays for shipping costs, in addition to any damage during shipping. The buyer is the one who would file a claim for damages if needed, as the buyer holds the title and ownership of the goods.
As an example, U.S. Company A buys watches from Vietnam and signs a FOB shipping point agreement. The cargo arrives at the receiving dock and the buyer takes ownership and liability. The watch glass breaks during transport overseas. The buyer is responsible, even though the watches were damaged before arriving on U.S. soil.
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What is FOB Destination?
FOB destination, sometimes called FOB destination point, means that the buyer takes ownership from the shipper upon delivery of goods, usually at the buyer’s receiving dock. To be crystal clear whether a shipper is referring to UCC or Incoterms, a shipper might include the final destination name and specify Incoterms definitions, by referring to FOB Savannah (Incoterms 2020) in the contract. That means the delivery port is Savannah and Incoterms definitions are referenced. Incoterms 2020 considers delivery as the point when the risk of loss or damage to the goods is transferred from the seller to the buyer.
This is also the moment that the supplier should record a sale since they’re taking ownership at the receiving dock. It’s common for high-value goods to be sent via FOB destination designation. That allows the buyer to ensure they arrive in good condition and can be inspected upon receipt. The seller retains liability until the buyer accepts the goods, ownership, and liability at the receiving dock, office or agreed-upon place of transfer, after inspecting for damage.
What is the Difference Between the Two Types of FOB?
The key difference between the two terms is which point they transfer responsibility for the goods. FOB Shipping Point means the buyer takes responsibility when the goods arrive at the shipper, but with FOB Destination the buyer doesn’t take responsibility until the goods arrive at their port.
Variations of FOB Destinations
There are four variations to FOB Destination.
Freight Prepaid and Allowed
The seller pays the freight charges and continues as the owner of the goods during transit.
Freight Prepaid and Added
While the seller pays the freight charges, they are billed to the buyer. The seller continues as the owner of the goods during transit.
Freight Collect
The buyer pays and bears freight charges when the goods are received, but while in transit the seller remains the owner.
Freight Collect and Allowed
The buyer pays the freight charge when the goods are received and deducts the freight charges from the invoice. The seller bears the freight charges and is the owner during transit.
Accounting Differences
It’s important, buyers and sellers have a point in time where the buyer takes ownership of the goods for accounting and capital assets. The moment of product transfer is needed, so it can be accurately entered in company records.
With FOB Shipping Point, the seller and buyer record the delivery when the shipment leaves the warehouse or shipping dock, but with FOB Destination, the seller and buyer record the sale/purchase when the shipment reaches the buyer’s dock. Ownership of the goods is defined by the bill of lading.
