Meaning
The FOB portion of this term is usually considered to be an abbreviation for “Free On Board”, although you might also see F stand for freight. In any case, the meaning for the user is the same. It indicates how long the product is in transit before it starts being charged to the receiver. It makes sense that the shipping point is at the doors of the shipper’s location. That is why it is called a shipping point. Thus, it means that transportation of goods is free to the receiver only until the place from which good are shipped.
In simple terms, the seller can be deemed to have fulfilled his obligations after the goods leave the seller’s warehouse and are received by the carrier, e.g. have crossed the ship’s rail and ended up on the ship. From this moment on, all the expenses associated with the transportation will be the buyer’s obligation, as well as unloading everything upon arrival at the place of destination, and further transportation to the buyer’s warehouse or store.
This is a situation when the transfer of ownership and (or) all risks and benefits associated with this appears before the physical receipt of the goods by the buyer and/or its arrival at the buyer’s warehouse. This also means that in case something happens during the transportation of the goods, it is the buyer who would be trying to get a reimbursement for losses/damage done.
The price specified in the invoice under these terms typically includes the final cost of products, taking into account export clearance with payment of export duties (if any), as well as the cost of delivering products to the shipping point. It is the receiver who takes full responsibility for the inventory while it is in transit. The seller’s main duty is to provide the buyer with goods of proper quality and deliver them to the shipping point on time.
Example
For instance, a buyer purchased merchandise for $12,000. The seller, accordingly, sold merchandise for the same amount of money. The terms are 2/10, net 30, FOB shipping point, $500. How would you journalize this?
Since the terms indicate that the sale is made at the shipping point, both parties should record this business activity as soon as the merchandise is brought to be shipped. This means that the buyer will increase its merchandise account even if it is still on its way and it might take a while for it to be actually delivered and stoved in the warehouse. In the buyer’s books, the purchase would be reflected as follows.
| Account | DR | CR |
| Purchases | $12,000 | |
| Accounts Payable | $12,000 |
Since the buyer is the owner of the goods while in transit, the freight charge would be recorded only in the buyer’s books. If any additional costs arise during the shipping, the buyer would be responsible for paying those. Thus, it is important that a bookkeeper accurately records the time when the sale is made. Below is the record a bookkeeper will make for the shipping costs.
| Account | DR | CR | |
| Freight-In | $500 | ||
| Cash | $500 |
The seller, on the other hand, would simply record the sale.
| Account | DR | CR |
| Accounts Receivable | $12,000 | |
| Sales | $12,000 |
