What is FOB Destination?FOB destination is a contraction of the term "Free on Board Destination." The term means that the buyer takes delivery of goods being shipped to it by a supplier once the goods arrive at the buyer's receiving dock. There are four variations on FOB destination terms, which are noted below. Show
FOB Destination, Freight Prepaid and AllowedThe seller pays and bears the freight charges and owns the goods while they are in transit. Title passes at the buyer's location. FOB Destination, Freight Prepaid and AddedThe seller pays the freight charges but bills them to the customer. The seller owns the goods while they are in transit. Title passes at the buyer's location. FOB Destination, Freight CollectThe buyer pays the freight charges at time of receipt, though the supplier still owns the goods while they are in transit. FOB Destination, Freight Collect and AllowedThe buyer pays for the freight costs, but deducts the cost from the supplier's invoice. The seller still owns the goods while they are in transit. Thus, the key elements of all the variations on FOB destination are the physical location during transit at which title changes and who pays for the freight. 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. Any type of FOB terms may be superseded if a customer elects to override those terms with customer-arranged pickup, where a customer arranges to have goods picked up at the seller's location, and takes responsibility for the goods at that point. In this situation, the billing staff must be aware of the new delivery terms, so that it does not bill freight to the customer. Since the buyer takes ownership of the goods at its own receiving dock, that is also where the seller should record a sale. The buyer should record an increase in its inventory at the same point (since the buyer is undertaking the risks and rewards of ownership, which occurs at the point of arrival at its shipping dock). Also, under FOB destination terms, the seller is responsible for the cost of shipping the product. If the goods are damaged in transit, the seller should file a claim with the insurance carrier, since the seller has title to the goods during the period when the goods were damaged. In reality, the shipper will probably record a sale as soon as merchandise leaves its shipping dock, irrespective of the terms of delivery. Thus, the real impact of FOB destination terms is the determination of who pays for the freight expense. Significance of FOB Shipping Point and FOB DestinationThe terms FOB shipping point and FOB destination have significance in accounting because they determine the following:
If the seller of goods quotes a price that is FOB shipping point, the sale takes place when the seller puts the goods on a common carrier at the seller's dock. Therefore, when the goods are being transported to the buyer, they are owned by the buyer and the buyer is responsible for the shipping costs. If a seller of goods quotes a price that is FOB destination, the sale takes place when they are unloaded at the buyer's destination. This means that the seller owns the goods while they are on the truck and the seller is responsible for the shipping costs. Example of FOB Shipping PointAssume 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. The buyer should record the purchase, the account payable, and the increase in its inventory as of December 30 (the date that the purchase took place). Since the goods on the truck belong to the buyer, the buyer should pay the shipping costs. These shipping costs will be an additional cost of the goods purchased. Example of FOB DestinationNow assume that a seller quoted $975 FOB destination and the seller loaded the goods onto a common carrier on December 30. Also assume that the goods are on the truck until January 2, when they are unloaded at the buyer's location. On December 31, the goods were owned by the seller. Therefore, the seller should continue to report these goods in its inventory until January 2. The seller will be responsible for the shipping costs, which will be an expense in January when the sale is reported. The buyer records the purchase, accounts payable, and the increase in inventory on January 2 when the buyer becomes the owner of the goods. Who pays for a shipment if it is FOB shipping?When it comes to the FOB shipping point option, the seller assumes the transport costs and fees until the goods reach the port of origin. Once the goods are on the ship, the buyer is financially responsible for all costs associated with transport as well as customs, taxes, and other fees.
Who pays the freight cost when the terms are FOB destination the seller the buyer the customer either the buyer or the seller?"FOB shipping point" or "FOB origin" means the buyer is at risk once the seller ships the product. The purchaser pays the shipping cost from the factory and is responsible if the goods are damaged while in transit. "FOB destination" means the seller retains the risk of loss until the goods reach the buyer.
When a shipment ships FOB destination the seller pays the freight and debits?FOB Destination, Freight Prepaid and Added
The seller pays the freight charges but bills them to the customer. The seller owns the goods while they are in transit. Title passes at the buyer's location.
When the terms of sale are FOB shipping point the buyer pays the freight charges?With FOB Shipping Point, the buyer is responsible for goods in transit, the buyer pays for shipping, and the point of transfer is when the goods leave the seller's place of business. (Figure)A buyer purchases $250 worth of goods on credit from a seller. Shipping charges are $50.
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