As with all Incoterms, FOB does not define the point at which ownership of the goods is transferred. The FOB shipping point agreement places the risk of loss or damage with the buyer during transit. The buyer assumes ownership and responsibility for the goods once they reach the shipping dock and are shipped. If the terms include the phrase “FOB origin, freight collect,” the buyer is responsible for freight charges.
- FOB destination agreement places more shipping responsibility on the seller.
- Keep in mind, though, that CIF agreements are normally much more expensive than others.
- Since the seller has more control, they may opt for a preferred shipper who may be more costly.
- The phrase passing the ship’s rail is no longer in use, having been dropped from the FOB Incoterm in the 2010 revision.
In the case of FOB Destination, the seller takes charge of export customs procedures, while the buyer handles import clearance procedures upon the goods’ arrival at the final destination. For the FOB shipping point, the buyer manages customs clearance and shipping documents both at the export and import stages of the shipping process. This differs from the FOB shipping point, where transfer occurs when goods leave the seller’s location. As an importer, exporter, or anyone involved in shipping products, you must understand that this term determines who bears responsibility during transit.
Though in line with the accounting treatment mentioned above, it is worth explicitly calling out that FOB shipping point and FOB destination transfer ownership at different times. In an FOB shipping point agreement, ownership is transferred from the seller to the buyer once goods have been delivered to the point of origin. Once at this shipping point, the buyer is the owner of the goods and at risk during transit.
How effective products move from the vendor to the customer depends on how well both sides understand free on board (FOB). FOB conditions may affect inventory, shipping, and insurance expenses, regardless of whether the transfer of products happens domestically or internationally. The term is used to designate ownership between the buyer and seller as goods are transported. Incoterms define the international shipping rules that delegate responsibility of buyers and sellers. Shipping terms affect the buyer’s inventory cost because inventory costs include all costs to prepare the inventory for sale.
FOB Destination
As such, FOB shipping means that the supplier retains ownership and responsibility for the goods until they are loaded ‘on board’ a shipping vessel. The buyer pays for the freight costs, but deducts the cost from the supplier’s invoice. Upper utilize advanced route optimization algorithms to streamline your logistics, ensuring timely deliveries and minimizing shipping costs. It even provides GPS tracking to help you gain insights into your shipments in real-time.
In addition to when responsibility and title for freight change hands, there is another difference between FOB shipping point and FOB destination. Only the party that possesses the title can claim the freight as part of their inventory. Because inventory counts can affect budgeting and income, i.e., the seller can only claim the goods as “sold” after they’ve transferred title and responsibility to the buyer, this is an important distinction.
Once the products have arrived at the buyer’s location, however, the buyer assumes full legal responsibility for them. However, even with the standardization, international trade is still a complicated process, especially when you consider that trade laws are often very different from country to country. To that end, many companies establish contracts between their organization and their customers, which can help streamline the process of shipping goods internationally.
Does FOB Mean Free Shipping?
While the two terms are similar in both sound and meaning, there is a distinct difference between them. That distinction is important as it specifies who is liable for goods that have been lost or damaged during shipping. When shipping goods to a customer, FOB shipping point or FOB destination may be two primary options to choose from. FOB shipping point holds the seller liable for the goods until the goods begin their transport to the customer, while FOB destination holds the seller liable for the goods until they have reached the customer. Alternatively, FOB destination places the burden of delivery on the seller. For example, assume Company XYZ in the United States buys computers from a supplier in China and signs a FOB destination agreement.
When you are shipping loose cargo (ie, not a full container), for example, your goods must go through a Container Freight Station (CFS) to be consolidated into a container. Of the 11 different incoterms that are currently used in international freight, Free on Board (FOB) is the one that you will encounter most frequently. What is FOB shipping, how does it differ from other incoterms, and when should you use it?
Free on Board Shipping Point vs. Free on Board Destination: An Overview
The term free on board (or freight on board) simply refers to freight that is being shipped over water instead of land or air. About 90 percent of all global freight is shipped via ocean and sea freight. Assume a fitness equipment manufacturer receives an order for 20 treadmills from a newly opened gym across the country.
Transportation costs
The expansion of the global market and the rise of e-commerce has led to some interesting challenges for international shippers. As logic would denote, the further away you’re shipping your freight, the more complicated the process becomes. Imagine the same situation as above except the terms of the agreement called for FOB destination. Instead of ownership transferring at the shipping point, the manufacturer retains ownership of the equipment until it is delivered to the buyer.
The distinction is important in specifying who is liable for goods lost or damaged during shipping. The primary difference between the two contracts is in the timing of the transfer of the title for the goods. Ownership of a cargo is independent of Incoterms, which relate to delivery and risk.
Accounting rules
This accounting treatment is important because adding costs to inventory means the buyer does not immediately expense the costs and this delay in recognizing the cost as an expense affects net income. 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. The term ‘free’ refers to the supplier’s obligation to deliver goods to a specific location, later to be transferred to a carrier. If the goods are damaged in transit, the seller should file a claim with the insurance carrier, since the seller has title to the goods during the period when the goods were damaged. Since the buyer takes ownership of the goods at its own receiving dock, that is also where the seller should record a sale. The seller pays and bears the freight charges and owns the goods while they are in transit.
