FOB Shipping Point vs. FOB Destination: What’s the Difference?

Fact checked by Timothy LiReviewed by Caitlin ClarkeFact checked by Timothy LiReviewed by Caitlin Clarke

FOB Shipping Point vs. FOB Destination: An Overview

Free on board (FOB) shipping point and free on board (FOB) destination are two of several international commercial terms (Incoterms) published by the International Chamber of Commerce (ICC). Understanding the difference between FOB shipping point and FOB destination is crucial for determining who is liable for goods during transit.

FOB shipping means the buyer assumes responsibility as soon as the goods leave the seller’s dock, while FOB destination indicates the seller retains responsibility until the goods reach the buyer’s location.

International commercial laws standardize the shipment and transportation of goods. These laws use specific terms outlined in detailed contracts to define delivery time, payment terms, and when the risk of loss shifts from the seller to the buyer. Known as Incoterms, these terms are published by the International Chamber of Commerce (ICC) to help navigate the complexities of international trade and differing country laws.

Free on board, also referred to as freight on board, only applies to shipments made via waterways and doesn’t apply to goods transported by vehicle or air.

Key Takeaways

• Free on board (FOB) is a trade term that indicates whether the buyer or the seller is liable for goods lost, damaged, or destroyed during shipment.
• A free on board shipping point indicates that the buyer is responsible for loss or damage when the goods reach the shipper.
• A free on board destination indicates that the seller retains liability for loss or damage until the goods are delivered to the buyer.
• FOB shipping point is usually paid for by the buyer, while FOB destination is usually paid for by the seller.
• FOB contracts have become more sophisticated in response to the increasing complexities of international shipping.

FOB Shipping Point

FOB shipping point, or FOB origin, means the title and responsibility for goods transfer from the seller to the buyer once the goods are placed on a delivery vehicle. This transfer of ownership at the shipping point means the seller is no longer responsible for the goods during transit. Instead, the buyer assumes all responsibility for the shipment when it leaves the seller’s dock.

For example, let’s say Company ABC in the United States buys electronic devices from its supplier in China and signs a FOB shipping point agreement. Company ABC assumes full responsibility if the designated carrier damages the package during delivery and can’t ask the supplier to reimburse the company for the losses or damages. The supplier’s responsibility ends once the electronic devices are handed over to the carrier.

Important

Recording the exact delivery time when goods arrive at the shipping point can be challenging. Constraints in the information system or delays in communication often cause a slight timing difference between the legal transfer of ownership and the accounting records.

FOB Destination

Conversely, with FOB destination, the title of ownership transfers to the buyer once the goods reach the buyer’s loading dock, post office box, or office building. This means the seller retains ownership and responsibility for the goods during the shipping process until they’re delivered to the buyer’s specified location.

For example, assume Company XYZ in the U.S. buys computers from a supplier in China and signs a FOB destination agreement. Assume the computers were never delivered to Company XYZ’s destination, for whatever reason. The supplier takes full responsibility for the computers and must reimburse Company XYZ or reship the computers.

Shipping terms affect the buyer’s inventory cost because inventory costs include all costs to prepare the inventory for sale. This accounting treatment is important because adding costs to inventory means the buyer doesn’t immediately expense the costs, and this delay in recognizing the cost as an expense affects net income.

Key Differences

Accounting Guidance

A primary difference between these two terms is how they’re accounted for. Since the buyer assumes liability after the goods are placed on the ship for transport, the company can record an increase in its inventory at that point. Similarly, the seller records the sale at the same time.

The accounting rules change for FOB destinations. In this case, the seller completes the sale in its records once the goods arrive at the receiving dock. That’s when the buyer records the increase in its inventory. The accounting entries are often performed earlier for a FOB shipping point transaction than a FOB destination transaction.

Transfer of Ownership

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.

Alternatively, FOB destination places the delivery responsibility on the seller. The seller maintains ownership of the goods until they are delivered, and once they’re delivered, the buyer assumes ownership.

Division of Cost

There’s also a difference in the division of costs. With 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 transport costs, customs, taxes, and other fees. In contrast, with FOB destination, the seller covers all costs and fees until the goods reach their destination. Upon arrival at the destination port, the buyer assumes responsibility for all fees, including duties, customs, taxes, and other fees.

FOB Shipping Point

• The sale is recorded in the general ledger when the goods have arrived at the point of origin.

• Transfer of ownership occurs when the goods have been delivered to the point of origin (the shipping point).

• Costs of shipment often reside with the buyer, as they are now considered owners during transit.

FOB Destination

• The sale is recorded in the general ledger when the goods have been delivered to the buyer.

• Transfer of ownership occurs when the goods have been delivered to the buyer (often the final destination).

• Costs of shipment often reside with the seller, as they are considered owners during transit.

Special Considerations

Other FOB Terms

There are also a range of different FOB shipment options, including but not limited to:

• FOB shipping point, freight prepaid: The buyer assumes the risk of the products being shipped once the goods arrive at the point of origin. However, the buyer may compensated by the seller, or the seller may incur upfront shipment costs on behalf of the buyer. The seller paid for shipping, but the risk still lands with the buyer.
• FOB shipping point, freight prepaid and charged back: The seller pays for shipping, but the buyer takes responsibility for the goods once they’re at the point of origin. The seller may bill the buyer for the shipping costs by adding them to an existing invoice or issuing a separate one.
• FOB destination, freight collect: The buyer pays for the shipping costs, but the seller retains ownership and responsibility for the goods while in transit.
• FOB destination, freight collect and allowed: The “and allowed” phrase means the seller adds shipping costs to the invoice, and the buyer agrees to pay that cost even if the seller coordinates and manages the shipment. Even though the buyer ultimately pays for the shipment, the seller is still responsible for the goods until they have been delivered.

Non-FOB Terms

Although FOB shipping point and FOB destination are among the most common terms, other agreements vary from these two.

• Free Alongside: The seller must deliver goods via ship, meet up with a ship during transport, and transport the goods using lifting devices to move them from one ship to the other.
• Free Carrier: The seller must ship the goods via aircraft, boat, or railway where the buyer operates. The buyer is obligated to take delivery at one of those destinations.
• Delivered Ex Ship: The seller must deliver products to a specific shipping port. When the ship arrives, the buyer is required to take delivery upon arrival.
• Ex Works: The seller must prepare the goods for delivery but is not responsible for actually delivering them. The buyer is responsible for making delivery arrangements and picking the goods up.

Note

Incoterms define the international shipping rules that delegate the responsibility of buyers and sellers. These terms are reviewed and updated once every decade.

Examples of FOB Shipping Point and FOB Destination

FOB Shipping Point

Assume a fitness equipment manufacturer receives an order for 20 treadmills from a newly opened gym located across the country. The terms of the agreement are to deliver the goods FOB shipping point.

The fitness equipment manufacturer is responsible for ensuring the goods are delivered to the point of origin. Once the treadmills reach this point, the buyer assumes responsibility for them. The manufacturer records the sale at the shipping point, at which time they also make an entry for accounts receivable and reduce their inventory balance.

Simultaneously, while the treadmills have not yet been delivered, the buyer has now officially taken responsibility for the goods. The buyer should record an accounts payable balance and include the treadmills in their financial records. The fact that the treadmills may take two weeks to arrive is irrelevant to this shipping agreement; the buyer already possesses ownership while the goods are in transit.

FOB Destination

Imagine the same situation above, except the agreement terms are for FOB destination. In this case, ownership doesn’t transfer at the shipping point. Instead, the manufacturer retains ownership of the equipment until it’s delivered to the buyer. Both parties don’t record the sale transaction in their general ledgers until the goods arrive at the buyer’s location. During transit, the seller retains the risk and responsibility for the goods. Additionally, if the goods are damaged in transit, the seller is responsible for replacing them at their own expense.

Who Pays for Shipping in FOB Shipping Point?

In FOB shipping point agreements, the seller pays all transportation costs and fees to get the goods to the port of origin. Once the goods are at the point of origin and on the transportation vessel, the buyer is financially responsible for costs to transport the goods, such as customs, taxes, and fees.

Who Retains Risk in FOB Shipping Point?

The seller is at risk until the goods reach the shipping point. Once the goods are shipped, the buyer is at risk. If the goods are damaged in transit, the loss is the buyer’s responsibility.

Is FOB Destination Better for a Buyer?

FOB destination is more favorable for a buyer. 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.

Does FOB Mean Free Shipping?

FOB stands for either “free on board” or “freight on board.” The term is used to designate buyer and seller ownership as goods are transported. FOB doesn’t explicitly mean the transportation of goods is free.

The Bottom Line

When shipping goods to a customer, FOB shipping point or FOB destination may be two primary options, and it’s crucial to understand the implications for both the buyer and the seller regarding ownership, liability, and costs.

FOB shipping point holds the seller liable for the goods until they’re transported to the customer, while FOB destination holds the seller liable for the goods until they have reached the customer. Choosing the right FOB term can significantly impact your business operations, financial records, and risk management, so consider these factors carefully.

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