Free on Board Destination or FOB Destination is one the International Commercial Terms (Incoterms) from the International Chamber of Commerce (ICC). It indicates the point at which the title of the goods transfers to the buyer. FOB Destination means the buyer owns the title of the goods once it arrives at the buyer’s dock. The ownership title rests with the seller during the transit.
So, in case, the goods get damaged in the transit, the seller is responsible. The seller needs to file a claim with the insurance company.
For example, Company A in the US buys mobiles from Company B in China under a FOB destination agreement. In case, Company A fails to get the delivery of mobiles, then Company B will be fully responsible. Company B must either resend the mobiles or reimburse Company A.
Types of FOB Destination
There are four types of FOB Destination terms, namely:
FOB Destination, Freight Prepaid and Added
In this case, although the seller pays the freight charges, but writes it in the account of the buyer. So, it is the buyer who has to pay the freight eventually. Until the goods are in transit, it is the seller who keeps the ownership of the goods. But, once the goods reach the receivers’ dock, the title passes from seller to the buyer.
Freight Prepaid and Allowed
In this case, the seller pays and bears the freight charges as well. Further, the seller also owns the goods that are in transit. The title would pass at the buyer’s location just like in the prepaid and added type.
FOB Destination, Freight Collect
The buyer takes the delivery of goods and pays the freight charges. In this case, also, it is the supplier who owns the title of the goods in transit.
Freight Collect and Allowed
Here, the buyer takes care of the freight charges initially but deducts the same from the supplier’s invoice. Similar to the above cases, it is the seller who holds the ownership of the goods in transit.
The buyer has the right to override the previously set arrangement if he or she decides to pick up the goods from the seller’s destination. However, if the buyer does that, they also have to take responsibility for the goods. The buyer and seller must always keep the billing staff in a closed-loop so that they are aware of the arrangements and change of terms.
FOB Destination Accounting
The risk and ownership of the goods pass to the buyer after the physical delivery of the good is done at the buyer’s dock. In this case, the seller pays all the expenses until he or she delivers the goods. The expenses such as freight charges come under “Selling Expenses.” Also, until the title of the goods passes to the buyer, the seller must include the goods in their inventory as goods in transit.
Buyer, on the other hand, does not incur any charges until the good reach buyer’s dock. Whether or not the buyer has to pay freight charges will depend on the agreement with the seller. If the buyer pays for the freight, it would go in the payable section along with the payment for the goods from the seller. Also, the buyer will now be responsible for all future expenses.
Buyer will record the purchase after the goods arrive at their dock. Similarly, the seller must also record the sales then.
Significance of FOB Destination
In the accounting world, FOB Destination holds a lot of significance as it helps determine the following:
- The purchase of goods and liabilities occurred in that relation.
- The sale of the goods and occurrence of receivables.
- Who pays the shipping cost, seller or the buyer.
FOB Shipping Point vs FOB Destination
Also known as FOB Origin, Free on Board (FOB) Shipping Point is another popular term in international business. It is about the title and ownership of the goods when goods are loaded on the delivery vehicle by the seller. In FOB shipping point, the title of the goods transfers to the buyer at the shipping point. Therefore, the seller is not responsible for the goods during the transit.
On the other hand, in the FOB destination, the title of ownership get transfers at the buyer’s loading destination. The ownership get transfers to the buyer once the seller delivers the goods at the buyer’s location. However, during the shipping of the goods, the seller legally owns and holds the responsibility for the goods in transit.
There is a difference in accounting for both the terms as well. Under FOB Destination, the buyer adds the purchase to the inventory once the good arrive at their dock. In the case of FOB shipping point, the buyer raises the inventory once the seller puts the goods on the ship.
There is a difference in the division of costs as well. In the FOB shipping point, the seller pays all the expenses until the goods reach the port of origin. Or, the buyer is responsible for all the expenses once the goods are on the ship. In the case of FOB destination, the seller undertakes all expenses until the goods reach the destination. Once the goods enter the buyer’s dock, expenses such as customs, taxes and other fees, are borne by the buyer.