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Overview of Free on Board (FOB)
Definition of
Free on Board (FOB)
What is Free on Board (FOB)? Free on Board (FOB), sometimes referred to as Freight on Board, is a shipping term used in both international and domestic trade contracts. It designates the point at which the title (ownership) and responsibility (risk of loss or damage, shipping costs) for goods transfer from the seller to the buyer. There are two main types: FOB Shipping Point (or FOB Origin), where the buyer assumes responsibility as soon as the goods leave the seller's dock, and FOB Destination, where the seller retains responsibility until the goods arrive at the buyer's specified location. Understanding FOB terms is critical for logistics and accounting.
Activities Related to
Free on Board (FOB)
Here is a list of FOB related activities:Â
Negotiating shipping terms in sales/purchase agreements, Arranging freight transportation, Purchasing shipping insurance, Determining who pays shipping costs, Recognizing revenue at the appropriate time, Recording inventory assets upon transfer of title, Calculating Cost of Goods Sold (COGS) based on ownership transfer point, Managing logistics and supply chain risks.
These activities are directly influenced by the specific FOB terms agreed upon.
The Importance of
Free on Board (FOB)
FOB terms are critically important as they clearly define financial and logistical responsibilities between buyer and seller. They determine who bears the cost of freight and insurance, and crucially, who owns the goods (and thus bears the risk) at each stage of transit. From an accounting perspective, FOB terms dictate when a seller can recognize revenue and remove inventory from their Balance Sheet, and when a buyer should record the inventory as an asset. Misunderstanding FOB terms can lead to disputes over lost or damaged goods, unexpected shipping costs, and incorrect financial reporting. Accurate bookkeeping requires correctly interpreting these terms.
Key Aspects of
Free on Board (FOB)
Responsibility Transfer
Defines the exact point where risk of loss and transportation cost liability shift from seller to buyer.
Primary Designations
FOB Shipping Point (buyer takes over at origin) and FOB Destination (seller is responsible until delivery at buyer's location).
Accounting Impact
Determines the timing of revenue recognition for the seller and inventory recording for the buyer, affecting both the Income Statement and Balance Sheet.
Concepts Related to
Free on Board (FOB)
Free on Board (FOB) is a key term in supply chain management and logistics. It directly relates to inventory accounting, influencing when inventory becomes an asset for the buyer and when costs move to Cost of Goods Sold (COGS). Understanding FOB is essential for correct bookkeeping and accurate financial statement preparation (Balance Sheet and Income Statement).
Free on Board (FOB)
in Action:
The Adventures of Coco and Cami
Coco orders specialty ingredients from afar. Professor A explains Free on Board (FOB) shipping terms, clarifying who is responsible if the delivery truck has an accident – Coco or her supplier?
Learn with Coco and Cami how FOB Shipping Point vs. FOB Destination impacts who pays for shipping and when Coco should officially record the ingredients as part of her inventory.