FOB is a shipping term that stands for “free on board.” If a shipment is designated FOB (the seller’s location), then as soon as the shipment of goods leaves the seller’s warehouse, the seller records the sale as complete. The buyer owns the product en route to its warehouse and must pay any delivery charges.
That also means that if a pallet of jewelry is lost or damaged in shipment, the buyer must file any claims for reimbursement – not the seller – since the shipment became the buyer’s responsibility immediately.
FOB destination
Of course, it is in the buyer’s best interest to have the shipping terms be stated as FOB (the buyer’s location), or FOB Destination. So if the buyer is headquartered in Minneapolis, Minnesota, the terms would read “FOB Minneapolis.” Only when the purchased shipment arrives in perfect condition does the buyer accept it and consider the items inventory in its system. The sale is officially complete at that point.
Accounting relevance
While shipping costs are determined by when the buyer takes ownership of a particular order of goods, a company’s accounting system is also impacted. If a shipment is sent FOB Shipping Point (the seller’s warehouse), then the sale is concluded as soon as the truck pulls out of the seller’s loading dock and is noted in the accounting system as such.
On the flipside, the buyer must note in its accounting system that it has inventory on its way. That inventory is now an asset on the buyer’s books, even though the shipment has not arrived yet.
Other shipping terms
While FOB is the most commonly-used shipping point, others include:
- FAS. Free Alongside, which means that the seller must deliver goods on a ship that pulls up next to a ship of a certain name, close enough that the ship can use its lifting devices to bring it onboard.
- FCA. Free Carrier, which means that the seller is obligated to deliver goods to an airport, shipping port, or railway terminal where the buyer has an operation and can take delivery there.
- DES. Delivered Ex Ship, which requires the seller to deliver products to a particular shipping port, where the buyer will take delivery on arrival.
- EXW. Ex Works, which only requires the seller to get products ready to be shipped from its location. The buyer is responsible for making any arrangements for shipment and for picking the goods up. This is very advantageous for the seller.
As a buyer who is negotiating with a seller who is a long distance from your operation, it is generally in your best interest to have the seller be responsible for delivering your shipment as close to your business as possible. Conversely, when you are selling to an overseas buyer, it is in your best interest for the buyer to become responsible as soon as it leaves your loading dock.