Free on Board FOB Explained: Who’s Liable for What in Shipping?

fob shipping

The seller has no direct control of, or knowledge of, what is happening to the goods once they leave the seller’s possession and are in the possession and control of the buyer’s carrier. 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. Understanding FOB is essential because it helps both parties determine ownership, outline who is responsible for transportation costs, and specify who files claims if goods are damaged en route.

Here’s a brief comparison of how costs are divided, using FOB and Ex Works Incoterms – and there’s more about EXW terms in this helpful article. FOB – which stands for Free on Board – is an Incoterm you might have come across when negotiating the purchase of goods for import to the UK. When you agree to receive items under FOB shipping point terms, it’s essential to be aware of your liabilities.

Free on Board (FOB) Explained: Who’s Liable for What in Shipping?

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. As an example of FOB destination accounting, suppose the value of the goods is 5,000 and the freight expense to the buyers destination of 600 is paid in cash by the seller. Bob’s background in exporting and importing stretches over more than 50 years, initially in international banking then in the world of international commerce. In all rules the seller must pay the costs of any checking operations which are necessary for delivering the goods, such as checking quality, measuring the goods and/or packaging, weighing, counting the goods and/or packaging. FOB (Free on Board) is the most commonly-used trade term but in practice it is used without reference to any version of the Incoterms® rules. In such cases it is then up to the seller and buyer to agree in their contract on what they mean when they use these three letters.

This becomes significant when you make out your financial statements for the quarter or any other period. The seller’s income statement shows the FOB sale as income as soon as it’s made. The income statement shows whether your business is profitable; the cash flow statement shows whether you have enough cash on hand to pay employees and creditors. At the buyers destination, the buyer has not yet incurred any freight but owes the seller for the goods. The buyer records the purchase, accounts payable, and the increase in inventory on January 2 when the buyer becomes the owner of the goods. In all rules there is no obligation from the buyer to the seller as regards packaging and marking.

Is free on board shipping (FOB) right for your business?

The buyer’s obligation is to take delivery when the goods have been delivered as described in A2. It was of course included in the first version of Incoterms® in 1936 and has remained identical in concept throughout the later versions. The risk transfer for DDP occurs when the goods are made available to the buyer at the final destination. Lastly, FOB tends to be the most cost-effective shipping option for the buyer as they can shop around for the best shipping rates available to them. We were a small shop in Texas, however, so we weren’t in Southern California to deal with U.S. customs and had no expertise in that area.

  • When the risk of loss shifts from the seller to the buyer and determining who foots the bill for freight and insurance, all depend on the nature of the contract.
  • Depending on where the cargo is traveling, they will usually send you some documentation, and ask you to sign an agreement stating that you wish for the forwarder to handle your shipment.
  • Regardless of whether that transfer occurs on the domestic or international level, FOB terms can impact inventory, shipping, and insurance costs.
  • In international shipping, for example, “FOB [name of originating port]” means that the seller (consignor) is responsible for transportation of the goods to the port of shipment and the cost of loading.
  • CIF is much more expensive for the buyer because they rely on the seller to include shipping in the price of their products.

The seller can also consider the sale completed once the cargo has been loaded onto the shipping vessel. FOB is advantageous for the buyer because it provides more flexibility and control over the logistics and shipping costs as they can choose their own shipping methods. Additionally, FOB lowers the buyer’s dependence on the seller if something goes wrong during the delivery as they have direct contact with the logistics company. Interestingly, the ownership for the goods transfers when the freight is loaded onto the truck from the origin point (the seller’s premises). Traditionally, the ownership transfer is defined in the contract of sale and bill of lading.

FOB stands for ‘Free on Board’, here’s everything you need to know about the popular shipping term:

Although FOB shipping point and FOB destination are among the most common terms, there are other agreements that vary from these two. It may be difficult to record delivery precisely when the goods have arrived at the shipping point. Due to constraints to an information system or delays in communication, it is more realistic that there is a slight timing difference between the legal arrangement and the accounting arrangement. With the advent of e-commerce, most commercial electronic transactions occur under the terms of “FOB shipping point” or “FCA shipping point”.

FOB shipping point, also known as FOB origin, indicates that the title and responsibility of goods transfer from the seller to the buyer when the goods are placed on a delivery vehicle. Free on board, also referred to as freight on board, only refers to shipments made via waterways, and does not apply to any goods transported by vehicle or by air. Free on board (FOB) shipping point and free on board (FOB) destination are two of several international commercial terms (Incoterms) published by the International Chamber of Commerce (ICC). The term FOB is also used in modern domestic shipping within North America to describe the point at which a seller is no longer responsible for shipping costs. Since there is more than one set of rules, and legal definitions of FOB may differ from one country to another, the parties to a contract must indicate which governing laws are being used for a shipment. Under FOB, the consignee has more control over the mode of transportation, whereas in DDP, the consignor is responsible for arranging the transportation.

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