what does fob shipping point mean

Therefore, when the goods are being transported to the buyer, they are owned by the buyer and the buyer is responsible for the shipping costs. These provisions outline the point when responsibility for risk of loss shifts to the buyer, who covers the freight charges, delivery location and time, and the payment terms for the shipments. FOB origin, or shipping point, means that the buyer will receive the title for the goods they purchased when shipment begins. The seller’s responsibility ends when the items are placed with a shipment carrier, and the buyer must ensure their goods reach their final destination on time and undamaged. Realistically, it is quite difficult for the buyer to record a delivery at the shipping point, since this requires proper notification into the buyer’s inventory management system from an outside location.

The transfer of title is the element of revenue that determines who owns the goods and the applicable value. FOB is only used in non-containerized sea freight or inland waterway transport. As with all Incoterms, FOB does not define the point at which ownership of the goods is transferred. Free on Board (FOB) is a shipment term that defines the point in the supply chain when a buyer or seller assumes responsibility for the goods being transported. FOB terms like FOB Origin and FOB Destination help define ownership, risk, and transportation costs for both buyers and sellers. Since the buyer takes ownership at the point of departure from the supplier’s shipping dock, the supplier should record a sale at that point.

FAQs related to FOB Shipping Point

If your business buys or sells overseas, you may be wondering about FOB, or “Free On Board” shipping. FOT (Free on Truck) is a term referring to cargo being carried by truck and can be used when shipping goods by truck. FOB (Free on Board) is an Incoterm® referring to cargo carried via sea or inland waterway. Unlike FOB shipping, the supplier is not required to ensure the safe movement from port to ship.

what does fob shipping point mean

The seller has no legal reason to accept those goods back and the return shipment could possibly result in additional damages. A buyer can save money by using FOB Destination since the seller assumes costs and liability for the transportation. However, the disadvantage for the buyer is the lack of control over the shipment, including shipment company, route, what does fob shipping point mean and delivery time. FOB shipping point and FOB destination indicate the point at which the title of goods transfers from the seller 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.

Transfer of Ownership

An FOB shipping point is a catch-all term for a contractual obligation that identifies the person who must bear the liability of a shipment. In an FOB origin arrangement, a purchaser pays for shipping from the factory to the shipment point. In FOB destination, the seller would pay for, and be liable for, transportation from herself to the buyer’s https://www.bookstime.com/ unloading dock. If you’re new to overseas freight shipping, navigating those uncharted waters can be confusing and overwhelming. This guide should help you gain a better understanding of at least one of the many trade terms you may encounter. With FOB destination, ownership of goods is transferred to the buyer at the buyer’s loading dock.

what does fob shipping point mean

From a practical perspective, recognition of receipt is instead completed at the receiving dock of the buyer. Thus, the sale is recorded when the shipment leaves the seller’s facility, and the receipt is recorded when it arrives at the buyer’s facility. This means there is a difference between the legal terms of the arrangement and the typical accounting for it. In FOB shipping point agreements, the seller pays all transportation costs and fees to get the goods to the port of origin.

What is the Difference Between FOB and FAS?

The point at which the goods’ ownership transfers and related shipping costs also affect your cost of goods sold (COGS). FOB means that you, as the buyer, are responsible for the goods as soon as they are loaded onto the ship on the seller’s end. Essentially, as soon as your freight is on board, you’re the one liable for them. Cost-wise, it means you pay for all transport costs, customs, and if anything happens after the seller loads them onto the ship.

The prepaid freight agreement says that the seller is responsible for the freight charges until the order arrives at the buyer’s destination. Then, the seller sends an invoice to the buyer for reimbursement when the items are delivered. When products are received at the location the customer specifies, ownership passes from the seller to the buyer. The seller maintains ownership of the goods–and responsibility for replacing damaged or missing items–under the FOB destination agreement until goods arrive at their destination. Until the products arrive at the buyer’s destination, the seller maintains ownership and is liable for replacing any damaged or missing items under the terms of FOB destination. Under the FOB shipping point, the buyer can record an increase in their inventory as soon as the products are placed on the ship.

What is FOB Shipping Point?

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 buyer and seller’s bill of sale or other agreement determines ownership; FOB status only indicates which party is responsible for the cargo from beginning to end. Rather, ownership is transferred to the buyer once the merchandise is delivered to the shipping point or its origin.

If anything happens to the goods on any leg of the journey to the buyer, the supplier assumes all responsibility. 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? Sometimes FOB is used in sales to retain commission by the outside sales representative.