Although the accounting treatment mentioned above aligns with this, it’s worth mentioning that FOB shipping points and destinations transfer ownership at different times. In a FOB shipping point agreement, ownership transfers from the seller to the buyer once the goods are delivered to the point of origin. At this shipping point, the buyer becomes the owner and bears the risk during transit. It’s worth noting that choosing between FOB Destination and FOB Origin is just one aspect of the broader topic of Incoterms.
Understanding Incoterms in International Shipping
- The risk of loss or damage passes from the seller to the buyer when the goods are loaded onto the vessel.
- 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.
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- That is why some companies may record this transaction in the delivery expense account.
- 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.
CIP stands for “carriage and insurance paid to” says that the seller pays for delivery and insurance of goods to a carrier or nominated location. When goods are labeled as FOB shipping point, the seller’s role in the transaction is complete when the purchased items are given to a shipping carrier and the shipment begins. For FOB Shipping Point agreements, the buyer assumes the risk almost immediately after the transaction starts, which can be unnerving, especially for high-value goods or volatile shipping routes. For buyers, FOB, especially the FOB Shipping Point, presents an opportunity to exert more control over the shipping process.
Insurance responsibility
However, other factors such as the location of the supplier and buyer, the type of goods, and the mode of transportation can also affect the cost of freight. It’s important to understand all of these factors when comparing costs and making a decision. Before negotiating, fob shipping point make sure you understand the consequences of using FOB shipping point or FOB destination for your purchase—in terms of costs, risks, and responsibilities. Some companies will offer different international shipping for different types of products.
Transparent cost division
It indicates the point when the costs and risks of shipping shifts from the seller to the buyer. FOB shipping point (aka FOB origin) means that the title and responsibility of goods transfer from the seller to the buyer at the point of shipping. FOB destination means that the title and responsibility are transferred at the final shipping destination. Here, the buyer records the FOB destination journal entry upon the goods’ arrival at the designated destination (the buyer’s receiving dock), along with an increase in inventory.
- If a buyer’s transportation department is proactive, it may avoid FOB destination terms, instead favoring FOB shipping point terms so that it can better control the logistics process.
- In transactions governed by FOB shipping point, the accounting process starts when the seller ships the goods.
- 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.
- While FOB shipping point does transfer risk to the buyer, it may affect a seller’s reputation and sales conversion rate.
- Under FOB destination terms, the seller is responsible for the cost of shipping the product.
CFR or “cost and freight” means that a seller agrees to arrange export and pay for the costs of shipping—but not for insurance, so the buyer takes on the risk of losses once the goods are onboard. If a shipment is sent under FOB destination terms, the seller won’t record the sale until the goods reach the buyer’s location. Likewise, the buyer won’t officially add the goods to its inventory until they arrive and are inspected. Incoterms aim to simplify international trade by offering a standardized set of terms, reducing misunderstandings and disputes. CIF stands for Cost, Insurance and Freight, whereas FOB stands for Free on Board. Both CIF and FOB are agreements used for international shipping when products are transported between a seller and buyer.
FOB Destination, Freight Collect
Alternatively, work with the seller to add additional coverage for shipping costs into your contract. In FOB agreements, the responsibility for shipping transfer to the buyer as soon as the goods leave the seller’s location under FOB Shipping Point. Or, the responsibility can transfer to the buyer once he or she receives the goods if there is a FOB Destination agreement in place.
