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Freight On Board Understanding How FOB Works in Shipping

what is fob shipping point

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. Another factor defined by FOB is which party is responsible for the shipping charges and insurance. FOB also determines when a business will record a sale for accounting purposes. If a shipment is designated as FOB Shipping Point, the sale will be recorded in the accounting system as soon as the shipment leaves the seller’s dock.

Which is cheaper FOB or CIF?

Buyers generally consider FOB agreements to be cheaper and more cost-effective. That's because they have more control over choosing shippers and insurance limits. CIF contracts, on the other hand, can be more expensive. Since the seller has more control, they may opt for a preferred shipper who may be more costly.

Assume a fitness equipment manufacturer receives an order for 20 treadmills from a newly opened gym across the country. The terms of the agreement are to deliver the goods FOB shipping point. Alternatively, FOB destination places the burden of delivery on the seller. The seller maintains ownership of the goods until they are delivered.

Division of Cost

FOB Destination is a shipping term which means that the seller retains the legal title to the goods until they reach the location of the buyer. There are many abbreviated trade terms in international shipping contracts. They describe many related matters, such as the time and place of delivery, the method of payment, the transfer of title to the goods, and who pays the freight and insurance costs. Terms indicating that the buyer must pay to get the goods delivered. (The buyer will record freight-in and the seller will not have any delivery expense.) With terms of FOB shipping point the title to the goods usually passes to the buyer at the shipping point. This means that goods in transit should be reported as a purchase and as inventory by the buyer. The seller should report a sale and an increase in accounts receivable.

Which is better EXW or CIF?

Generally, EXW is the cheapest and CIF is the most expensive. If two suppliers give you nearly identical prices but one quotes EXW shipping incoterms and the other quotes FOB or CIF, the second quote will cost you significantly less.

The cost and risk of the shipment are transferred to the buyer only after the goods are on board safely at a mutually agreed upon shipping port. The shipper is free of any obligation regarding the goods once they are on the ship. A straightforward definition of FOB shipping point is that it releases the seller from any obligation to the package once it gets shipped. It simply means that for a seller who has an overseas buyer, it is in its best interest to have the buyer be responsible for any loss or damage of the package when it gets shipped. Conversely, a buyer who is shopping from an online store with an address located out of the country would want to have an FOB destination rather than FOB shipping point. The question about who will be held accountable for the shipment, between the buyer and the seller, is certainly an important matter to discuss. It is ideal to have a transparent agreement between both parties so that it would end up to a smooth transaction on both sides.

Free on board shipping vs. free on board destination: What’s the difference?

Check out this guide to learn about the different invoice types businesses can send and receive. FAS or Free Alongside means the seller must deliver the shipment to a ship that is close to a certain ship, which can then use its lifting devices to bring the goods onboard. This suggests that there is a difference between what the term implies and its actual accounting implementation. With FOB shipping points, ownership of the goods passes to the buyer once they leave the supplier’s shipping point. The most common trade term is the International Code for the Interpretation of Trade Terms , but companies shipping to the United States must also comply with the Uniform Commercial Code. We want to clearly present to you the difference between FOB destination and FOB shipping point. Here are some examples about how it works and how it impacts the seller and the buyer.

what is fob shipping point

The term “free on board”, or “f.o.b.” was used historically in relation to the transfer of risk from seller to buyer as goods what does fob shipping point mean are shipped. More and more small businesses are now relying on freight to transport their goods from one region to another.

FOB Shipping Point or FOB Destination – Which is Better?

As with all Incoterms, FOB does not define the point at which ownership of the goods is transferred. The buyer owns the products en route to its warehouse and must pay any delivery charges. The fitness equipment manufacturer is responsible for ensuring the goods are delivered to the point of origin.

According to the generally accepted accounting principles , a business cannot record revenue until the transfer of risks and rewards of the goods from the seller to the buyer. The seller is responsible for all expenses until the goods are loaded onto the vessel at the port of shipment. Any costs incurred for loading the goods on to the cargo ship are also the seller’s responsibility. Should any of the goods get damaged or lost during shipment, it is the buyer, not the seller who should file any claims for reimbursement. EXW. Ex Works, which only requires the retailer to get products ready to be shipped from its location. The buyer is responsible for making any settlements for the shipment and for picking the goods up.

What Does FOB Shipping Point Mean?

Once this happens, and the legal title of all goods is transferred to the buyer, the seller is no longer responsible for the goods. There are many industry terms importers and exporters need to be well-versed in to guarantee their shipping relations are well understood. Some are more common than others, such as Free On Board , Free Carrier , and Ex Works . FOB, while being a fairly common term within freight collect shipping, is largely misunderstood. In this article, ShipCalm will explore what FOB is, the pros and cons of FOB, and how a third-party logistics company like ShipCalm can help your business with all its shipment needs. For instance, Company B in the Philippines buys medical equipment from Taiwan and signs an FOB destination agreement. Let us say that the medical equipment didn’t arrive at the Company B’s specified address because of any reason.

In FOB Shipping Point buyer must record the purchase as soon as the goods leave the seller’s warehouse . In practice, however, it is difficult for the buyer to record the delivery when the goods leave the seller’s warehouse. It requires proper notifications to enter the buyer’s inventory management system. Thus, the receipt of goods completes at the receiving dock of the buyer.

What Does FOB Mean on an Invoice?

That distinction is important as it specifies who is liable for goods that have been lost or damaged during shipping. The term “freight on board” originated from the days of sailing ships when goods were “passed over the rail by hand,” as defined in Incoterm.

what is fob shipping point

Incoterms apply to both international trade and domestic trade, as of the 2010 revision. Under the Incoterms 2020 standard published by the International Chamber of Commerce, FOB is only used in sea freight and stands for “Free On Board”. This means that the seller pays for carrying costs until he places the goods at your disposal anywhere on your premises including storage areas, loading ramps and any connecting parts of your premises. Under the terms of FOB responsibilities for covering costs, losses or damages are divided between both the seller and the buyer.

Incoterms define the international shipping rules that delegate responsibility of buyers and sellers. Would you like to organise freight shipping and have the full support of a logistics expert? When agreeing upon FOB Origin the only responsibility of the seller is to properly package the goods for transport. The buyer is hereby responsible and liable for the cargo from the collection point.

  • 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.
  • Under the FOB shipping point the buyer can record an increase in their inventory as soon as the products were placed on the ship.
  • That allows the buyer to ensure they arrive in good condition and can be inspected upon receipt.
  • You purchase goods from a supplier in China and agree to FOB shipping terms.
  • FCA. Free Carrier, which symbolizes that the seller is obligated to deliver goods to the railway terminal, shipping port, or on the airport where the buyer has an operation and can take delivery there.
  • Alternatively, FOB destination places the burden of delivery on the seller.

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. FOB shipping and FOB destination are the main categories to determine when the title of the goods is transferred from the seller to the buyer, who pays the fees and who is liable. But there are some finer points to know, and you may see these terms on your invoice or bill of lading. Company A buys watches from Vietnam and signs a FOB Newark agreement. The shipment is sent to Newark, New Jersey, and the watches are damaged in transit.


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