FOB Destination Shipping Definition and Freight Costs with Examples

FOB Destination Shipping Definition and Freight Costs with Examples

‘FOB Destination, Freight Prepaid’ is the opposite of ‘FOB Destination, Freight Collect’ and is used to indicate that the seller assumes the cost of freight. It’s important that you have a clear understanding of FOB shipping so that you know what your rights and obligations are from the start of your contract. CIF is a more expensive contract option than FOB, as it demands more effort and expense on the part of the supplier. To further clarify, let’s assume that Claire’s Comb Company in the US purchases a container of The Wonder Comb from a supplier based in China. 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. This means that no matter where you ship from, you will encounter the same regulations.

In this, the seller is responsible for all the cost incurred in transporting the goods from the source to the destination which includes shipping costs, insurance, import and export duties, taxes etc. The point at which the title and responsibility for transportation costs transfers is essential to the various forms of FOB destination. The transportation law firm bookkeeping department of a forward-thinking customer could choose FOB shipping point terms over FOB destination ones to maintain tighter control over the logistics process. In North America, the term “FOB” is written in a sales agreement to determine when the liability and responsibility for the shipped cargo transfers from the seller to the buyer.

FOB destination on seller’s side

FOB shipping point is a further limitation or condition to FOB, as responsibility changes hands at the seller’s shipping dock. 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. These international contracts outline provisions including the time and place of delivery as well as the terms of payment agreed upon by the two parties. 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.

Likewise, the transportation cost will include in the journal entry for FOB shipping point on the buyer’s side. And on the seller’s side, we will only need to record the sale transaction since the buyer is the one that is responsible for the transportation or the delivery of goods. FOB shipping point transfers the title of the shipment when the goods are placed at the shipping point. This is usually the seller’s loading dock, delivery truck, or postage office. As soon as the seller brings the goods to the point of shipment, the legal title of those goods passes to the buyer and the seller is no longer responsible for the goods during delivery. If the carrier damages the package, the buyer can’t come after the seller because the title has already transferred.

Disadvantages of FOB

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. The transportation department of a buyer might insist on FOB shipping point terms, so that it can take complete control over the delivery of goods once they leave a supplier’s shipping dock. For example, we still have the same transaction of the $5,000 credit sale of goods and an unpaid transportation cost of $150 as above. However, in this example, the shipping term on the invoice is stated as “FOB Shipping Point”. The buyer is responsible for all the costs related to the transportation of goods under FOB shipping point.

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. If you’re shipping items internationally, it’s essential to understand the terms and conditions of FOB.

Significance of FOB Shipping Point and FOB Destination

The supplier from Taiwan will be liable to process reimbursement or replacement for the undelivered medical equipment. The risk transfer for DDP occurs when the goods are made available to the buyer at the final destination. DDP also requires sellers to transport goods to the final location and pay for any relevant import customs formalities. Previously, the Incoterms suggested that a ship’s rail serves as the point where the goods were loaded onto the vessel. However, under Incoterms 2020, the loading is fulfilled only when the goods are on board the ship and the cables are no longer holding the container. As mentioned, there are two distinct types of FOB shipping terms, and there are additional add-on terms that buyers use to reduce or extend the responsibility to the seller in FOB shipping.

• Under FOB Shipping Point terms, the transfer of ownership and the responsibility for goods occurs at the seller’s shipping dock, where the goods are loaded onto a delivery vehicle.
• Once the delivery is unloaded in the receiving country, responsibility is transferred to you.
• 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 risk transfer occurs at a different point when the goods are actually loaded onto the shipping vessel.
• In the freight term, FOB shipping point means that buyer is responsible for the transportation of goods.
• The seller selects the freight carrier and is responsible for shipping the goods to the final destination point.
• 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.

To help simplify that, at least in part, international commercial laws have been established over the past few decades to help standardize the rules and regulations surrounding the shipment and transportation of goods. It is much easier to determine when title transfers by referring to the agreed upon terms and conditions of the transaction; typically, title passes with risk of loss. The transfer of title may occur at a different time (or event) than the FOB shipping term. The transfer of title is the element of revenue that determines who owns the goods and the applicable value.

On the contrary, the supplier bears all the costs till the goods reach the buyer’s location in free on board destination. 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. As the freight term on the invoice is “FOB Shipping Point”, the company ABC as a buyer will be responsible for the inventory goods on board and pay for the transportation cost.

• 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.
• The buyer is responsible for all the costs related to the transportation of goods under FOB shipping point.
• With a CIF agreement, the seller agrees to pay the transportation fees, which include insurance and other accessorial fees, until the cargo is transferred to the buyer.
• Then the buyer records the transaction and increase in inventory on 5th Feb’19.
• The responsibility transfers to the buyer as soon as the goods are loaded onto the nominated shipping vessel.
• Until the items have arrived at the buyer’s location, the seller retains legal responsibility for them.