The international commercial law has been in effect for a long time and were formulated to harmonize the rules and regulations governing the transportation and shipment of products. Special contracts are in place is crucial since international trade can be complex and trade laws vary between different countries.Fob destination: Free On Board Shipping Point vs. Free on Board Destination
The international contracts define a variety of terms such as the time and location of delivery, as and the terms of payment that are agreed by the parties. The danger of losing shifts from buyer to the seller and deciding who will pay for insurance and freight, everything is dependent on the terms of the agreement.
The Free-onboard (FOB) location for shipping as well as Free on-board (FOB) location are among the commercial terms used internationally (Incoterms) released through the International Chamber of Commerce (ICC). 1.
The FOB shipping point and the FOB destination refer to the point at which title of goods passes over from seller to buyer. This distinction is crucial to determine who is accountable for damages or loss of goods in shipping. The main difference between two contracts lies in the date of transfer of title for the merchandise. 2
“Free on Board” Also known in the context of “freight on board is only referring to shipments that are that are made by waterways. It is not applicable to items transported via vehicle or via air.
Free On board (FOB) Shipping Point
The FOB shipping location, which is also referred to in the field of FOB, means that ownership and the responsibility of the goods pass between the vendor and the purchaser when the items are put on the delivery vehicle.
Because FOB shipping point is the place where title transfers to the delivery of goods at the time the goods are delivered at the point of delivery the legal title of the goods passes onto the purchaser. So the seller is not responsible for the items when they are delivered. The FOB shipping point is another restriction or condition of FOB delivery, since responsibility shifts between the seller and the dock for shipping.
For instance, suppose Company ABC in the United States purchases electronic equipment from its suppliers in China and the company sign a FOB shipping point agreement. If the carrier chosen by the designated company is unable to deliver the item in a timely manner, Company ABC assumes full responsibility for the damage and is not able to demand that the supplier reimburse the company for any loss or damage. The supplier is solely accountable for the delivery of their electronic equipment to the transporter.
Free On Board (FOB) Destination
In contrast, when FOB is the destination the title of ownership transfers to the loading dock of the buyer, post office box or in the office structure. When the items are transported to the purchaser’s designated address, the title of ownership passes over from the vendor to the customer. Thus it is the legal owner of the product and is accountable for the items when they are shipped.
For instance, suppose Company XYZ in the United States purchases computers from a vendor located in China and sign an FOB destination agreement. The computers are assumed to have never been shipped to the destination of Company XYZ’s regardless of the reason. The provider assumes full responsibility for the computer and must either pay back the company XYZ or return the computers.
Shipping terms impact the cost of inventory for buyers since inventory costs cover all expenses in preparing inventory to sell. This accounting procedure is vital since adding inventory costs implies that the buyer cannot immediately deduct the cost which means that the delay of accounting the expense impacts the net income.
Key differences
Accounting Guidance
One of the main differences of the differences between these phrases is the method by how they are counted. As the buyer takes on the liability when the goods are put onto the vessel for transportation and the business can then note an increase in its inventory up to that moment. The seller also records the sale simultaneously.
Accounting rules change when you are at FOB destinations. In this instance the seller will complete the sale on its own records after the items arrive at the dock for receiving. The buyer then records the rise in its inventory. In general, accounting entries are usually made sooner for FOB shipment point transaction rather than the FOB location transaction.
Transfer of Ownership
Although it is in line with the accounting procedure discussed above, it’s important to note how ownership transfers between FOB shipping destination and FOB shipping location occur at different dates. When you sign the case of an FOB shipment point contract, ownership shifts by the supplier to the customer after items have been delivered to the place of their origin. At this point the buyer is the rightful owner of the items and is at risk while they are in shipping.
The alternative is to place the responsibility of delivery on the seller. The seller is the owner of the merchandise up until the time they reach their destination. After delivery the buyer takes over ownership.
Division of Cost
There’s also a distinction in the cost division. If you choose an FOB shipping point, the seller takes on the transport cost and other fees until the product reaches the point of origin.
When the items are placed on the ship, the purchaser has to pay all expenses related to transportation along with taxes, customs and other costs. And When the destination is FOB the seller takes on all fees and costs until the items reach their destination. When the goods are brought into the port, all costs–including customs, duties, taxes and other charges are borne from the buyers.
FOB Shipping Options
FOB Shipping Point
The sale is registered on the ledger general after the merchandise has arrived at the point of the point of.
Transfer of ownership takes place after the items have been delivered to the place of the point of origin (the the point of delivery).
The cost of shipping is usually on the buyer, as they are considered to be as the owner during the transportation.
FOB Destination
The sale is recorded in general ledger after the items were delivered to the purchaser.
Transfer of ownership takes place when the product has been handed over to the purchaser (often the destination of final delivery).
The cost of shipping is usually at the expense of the seller since they are considered to be owners when the shipment is in the process of shipping.
Special Takes into Account
Other FOB Terms
There is also a variety of options for FOB shipping that include but are not only:
FOB the point of delivery, freight prepaid The buyer is responsible for the items that are being shipped after the goods arrive at the point of their origin. However, the buyer might be receive compensation from the seller or the seller could be required to pay for shipping upfront for the buyer. Although the seller may have paid for shipping, the risk is still on the buyer.
FOB the shipping location, freight paid and refunded: The seller is able to charge for shipping, and the buyer is responsible for the products when they arrive at the place of delivery. the seller could decide to invoice the buyer for shipping payments. These charges can add to the invoice or in a separate one.
FOB delivery freight collect: Even though the buyer is responsible for shipping charges but the seller owns the items during transportation and is accountable for the items while they are in transit.
FOB delivery, freight collection and permitted”and allowed”: The “and allowed” phrase means that the seller will add shipping charges to the invoice. The buyer is required to pay the cost, even if the seller coordinates and oversees the shipment. While the buyer in the end has to pay for the shipment but the seller remains accountable for the items until they are delivered.
Non-FOB Terms
While FOB Shipping point as well as FOB destination are two of the most commonly used terms There are also other agreements that differ from the two.
A Free Assist: Seller needs to deliver the goods by ship, and meet with the ship during transportation and the items are transported by lifting equipment to transport the items from one vessel to the other.
free carrier: A seller is required to transport the product via air or boat, or by railway in the event that the buyer is operating an operation. The buyer must pick up the delivery at any of these locations.
Delivery Ex-Ship The seller is required to deliver the product to a specified shipping point. Once the ship is delivered the buyer has to pick up the delivery at the time of its arrival.
In Ex Works, the seller is required to prepare the items to be delivered, but isn’t accountable for the actual delivery of the items. The buyer is responsible for arranging arrangements for delivery as well as taking the goods to their destination.
An example of FOB Shipping
FOB Shipping Point
Imagine that an exercise apparatus maker gets an order from a recently opened fitness center across the nation. The conditions of the contract include the delivery of the product to the shipping point FOB.
Fitness equipment manufacturers are accountable for ensuring that the products are delivered to the place of their point of. This is the primary point of transportation where the purchaser will take over the responsibility of the treadmills. The manufacturer of the equipment would not be able to record the sale until it is delivered to the point where the shipment is made and at that moment that the manufacturer will make an entry in its accounts receivable, and decrease the inventory balance.
However although the treadmills haven’t yet arrived, it is clear that the purchaser has officially assumed charge of the products. At the point of delivery the buyer will have an account payable balance that is open however, they must also keep the treadmill on their financial documents. The fact that treadmills could take up to up to two weeks for delivery is not relevant in this shipping contract; the buyer already has ownership of the items while they are in the process of being shipped.
FOB Destination
Imagine the exact same situation similar to the above scenario, however the conditions of the agreement required FOB delivery. Instead of the ownership transfer occurring at the point of shipping the manufacturer is still in charge to the machine until it’s handed over to the purchaser. Both parties are not able to enter the sale transaction in the general ledger till products have reached the buyer. Likewise, the seller is still responsible for the items while they are being transported.
Who pays for shipping at FOB Shipping Point?
In the FOB shipping point agreement the seller is responsible for all costs for transportation and fees for getting the goods to the point of the point of. When the items are at their place of origin and placed on the transport vessel buyers are financially accountable for all costs to transport the items including taxes, customs and charges.
Who takes the risk at the FOB Shipping Point?
The seller is at risk until the items reach the point at which they are shipped. After the goods have been shipped to the buyer, the buyer is at risk. If the product is damaged during transport then the loss is the responsibility of the purchaser.
Is FOB Destination more beneficial for Buyers?
A destination that is FOB is preferential for buyers. The buyer isn’t responsible for the items during transport so the buyer is typically not liable to cover shipping costs. The buyer also has the option to defer ownership until items have been delivered to them, and they can inspect the goods before physically taking possession of the items to record any issues or damages.
Do you think FOB means free shipping?
FOB is a reference to either “free on board” or “freight on board”. The word is used to indicate ownership between the seller and buyer in the event that goods are moved. FOB is not a specific reference to that the transport of goods is cost-free.
