Goods shipped EXW will usually be cheaper FOB since Free on Board would have the supplier bear the costs of transportation, handling, and customs clearance. EXW terms, however, are often riskier for the seller since they are responsible for the goods until they reach their destination. Assume that a seller quoted a price of $900 FOB shipping point and the seller loaded the goods onto a common carrier on December 30. Also assume that the goods are in transit until they arrive at the buyer’s location on January 2. On December 30, the seller should record a sale, an account receivable, and a reduction in its inventory.
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When it is indicated as “FOB Origin,” it means that the transfer occurs at the seller’s shipping dock when the goods are safely on board the ship. The term FOB shipping point is a contraction of the term Free on Board Shipping Point. It means that the customer takes delivery of goods being shipped to it by a supplier once the goods leave the supplier’s shipping dock.
- Incoterms are published and maintained by the International Chamber of Commerce (ICC).
- The International Chamber of Commerce publishes international and domestic standards for the most commonly used delivery contracts.
- Also, under these terms, the buyer is responsible for the cost of shipping the product to its facility.
- FOB Origin and FOB Destination each come with their own set of responsibilities, costs, and risks for buyers and sellers.
- FOB status says who will take responsibility for a shipment from its port of origin to its destination port.
Consider shipping costs
All of our content is based on objective analysis, and the opinions are our own. Adding costs to the inventory means that the buyer doesn’t expense fob shipping point the costs right away, and this delay affects net income. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping.
Types of Free on Board Destination
With the FOB shipping point option, the seller assumes the transport costs and fees until the goods reach the port of origin. However, it also entails drawbacks, including the potential for disputes over transfer points, limited control over the shipping process, and inherent risks of loss or damage during transit. 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. The main difference between CIF and FOB is who is responsible for the products in transit.
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. If you’re new to overseas freight shipping, navigating those uncharted waters can be confusing and overwhelming.
- Once the goods reach port in your country, you may also have to pay to have them unloaded from the ship or plane, unpacked and prepared to be shipped onward.
- If a shipment is sent under FOB destination terms, the seller won’t record the sale until the goods reach the buyer’s location.
- Most companies shipping internationally by sea opt for either Free on Board (FOB) or Cost, Insurance, and Freight (CIF) agreements.
- A free on board (FOB) designation specifies whether the buyer is responsible for freight charges.
- All of our content is based on objective analysis, and the opinions are our own.
- FOB shipping point transfers the goods to the buyer at the point the goods are loaded into the truck or the shipping point.
FOB shipping point vs. FOB destination
In international trade, ownership of the cargo is defined by the contract of sale and the bill of lading or waybill. 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. The buyer is not responsible for the goods during transit; therefore, the buyer often is not responsible for paying for shipping costs. The buyer is also able to delay ownership until the goods have been delivered to them, allowing them to do an initial inspection prior to physically accepting the goods to note any damages or concerns.
This centuries-old shipping term has evolved into a critical concept of determining the reliability and ownership transfer. The internationalization of markets and technological progress in logistics, distribution, and communication means this affects almost every product consumers buy. With an accrual accounting system, income and expenses are reported as soon as cash is earned or debt is incurred. So, an FOB transaction could muddy your financial picture as you make a quarterly financial statement.