If you’re confused by the terms FOB shipping or FOB destination, get in line. While the concepts are not difficult to master, the fine detail may put your head in a spin. What is the difference when comparing FOB shipping point vs FOB destination? The overarching idea is that free on board (FOB) is a shipping term indicating who (buyer or seller) is responsible for goods that are damaged, lost or destroyed during shipping. It indicates who “owns” the goods during transit, when that ownership changes, and who pays for the shipping, associated fees, and other freight charges. In international shipments, FOB refers to non-containerized sea freight or inland waterway transport. The term “free” is defined as the seller’s obligation to deliver the contracted goods to a named place, for goods transfer to a carrier. Show Knowing the difference between FOB shipping and FOB destination can help you determine whether the shipping charges on your bill of lading are accurate or not. Errors on your bill of lading can often lead to shipping costs that you may not be responsible for, so with proper knowledge of these terms and shipping consulting, you can protect yourself from overspending.
June 21, 2022/ Steven Bragg
The term FOB is an abbreviation of free on board. If goods are shipped FOB destination, transportation costs are paid by the seller and title does not pass until the
carrier delivers the goods to the buyer. These goods are part of the seller’s inventory while in transit. If goods are shipped FOB shipping point, transportation costs are paid by the buyer and title passes when the carrier takes possession of the goods. These goods are part of the buyer’s inventory while in
transit. The terms FOB destination and FOB shipping point often indicate a specific location at which title to the goods is transferred, such as FOB Denver. This means that the seller retains title and risk of loss until the goods are delivered to a common carrier in Denver who will act as an agent for the buyer. The rationale for these determinations originates in agency law, since transfer of title
is conditioned upon whether the carrier with physical possession of the goods is acting as an agent of the seller or the buyer. Accounting for Freight Accounting for Inventory Inventory
Management Merchandise often must be delivered from the seller to the buyer. It is important to know which company - either the seller or the purchaser - owns the merchandise while it is in transit and in the hands of a third-party transportation company, such as UPS. The company that owns the merchandise must absorb the transportation cost as a business expense. The shipping terms specify which company owns the merchandise while in transit. Terms may be FOB destination
or FOB shipping. The acronym FOB stands for “Free On Board” and is a shipping term used in retail to indicate who is responsible for paying transportation charges. It is also the location where ownership of the merchandise transfers from seller to buyer. If the shipping terms are FOB destination, ownership transfers at the destination, so the seller owns the merchandise all the while it in transit. Therefore, the seller absorbs the transportation
cost and debits Delivery Expense. The buyer records nothing. If the terms are FOB shipping, ownership transfers at the origin as it leaves the seller’s facility, so the buyer owns the merchandise all the while it is in transit. The buyer therefore absorbs the transportation cost and debits Merchandise Inventory; the transportation charges just become part of the purchase price of the inventory. In the case of FOB shipping, the buyer may
contract directly with the transportation company (and the seller records nothing) OR the seller may pre-pay the shipping costs and pass them along in the invoice to the buyer. There are three possible scenarios regarding transportation, as follows: 1. Terms are FOB destination The seller calls UPS to pick up the shipment from his loading dock. The seller is billed by UPS and ultimately pays the bill and absorbs the expense. BUYER SELLER 11. Purchase 50 items on account for $10 each, terms FOB destination. Transportation charges are $20 on account. 12. Sell 50 items on account for $10 each, terms FOB destination. Each item cost $4. Transportation charges are $20 on account. Date Account Debit Credit Date Account Debit Credit 11 Merchandise Inventory 500 12 Accounts Receivable 500 Accounts Payable 500 Sales 500 Date Account Debit Credit 12 Cost of Merchandise Sold 200 Merchandise Inventory 200 Date Account Debit Credit 12 Delivery Expense 20 Accounts Payable 20 The seller uses Delivery Expense to record transpor- tation charges only when terms are FOB destination. NOTE: If the information about the transportation says the seller is billed or invoiced by UPS, credit Accounts Payable (as shown above.) If the informa- tion says the buyer paid UPS, credit Cash instead. 11. You pay the amount invoiced at the time of the purchase. 11. Your customer pays you the amount invoiced for the sale. Account Debit Credit Debit ▼ Accounts Payable 500 ▲ Cash ▼ Cash 500 ▼ Accounts Receivable 500 2. Terms are FOB shipping The purchaser calls UPS to pick up the shipment from the seller’s loading dock. The purchaser is billed by UPS. Since the buyer is dealing with two different parties – the seller and the transportation company, the buyer records two journal entries. BUYER 13. Purchase 50 items on account for $10 each, terms FOB shipping. Transportation charges are $20 on account. 14. Sell 50 items on account for $10 each, terms FOB shipping. Each item cost $4. Transportation charges are $20 on account. Date Account Debit Credit Date Account Debit Credit 13 Merchandise Inventory 500 14 Accounts Receivable 500 Accounts Payable 500 Sales 500 Receive an invoice from UPS for the shipping. Date Account Debit Credit Date Account Debit Credit 13 Merchandise Inventory 20 14 Cost of Merchandise Sold 200 Accounts Payable 20 Merchandise Inventory 200 The purchaser uses Merchandise Inventory to record transportation charges when terms are FOB shipping. Shipping becomes part of the cost of the merchandise. The first Accounts Payable is to the seller; the second one is to the shipping company. The seller does not record transportation charges at all since terms are FOB shipping. NOTE: If the information about the transportation says the buyer is billed or invoiced by UPS, credit Accounts Payable (as shown above.) If the informa- tion says the buyer paid UPS, credit Cash instead. 11. You pay the amount invoiced to the vendor. (You do not pay the UPS invoice yet.) 11. Your customer pays you the amount invoiced for the sale. Assume payment terms are 2/10, net 30 under the gross method. Account Debit Credit Account Debit Credit ▼ Accounts Payable 500 ▲ Cash 500 ▼ Cash 490 ▲ Sales Discounts 10 ▼ Merchandise Inventory 10 ▼ Accounts Receivable 500 BUYER SELLER 15. Purchase 50 items on account for $10 each, terms FOB shipping. Transportation charges are $20 on account. 16. Sell 50 items on account for $10 each, terms FOB shipping. Each item cost $4. Transportation charges are $20 on account. Date Account Debit Credit Date Debit Credit 15 Merchandise Inventory 520 16 Accounts Receivable 520 Accounts Payable 520 Sales 500 The purchaser includes the shipping cost as part of the inventory cost and pays the seller not only the cost of the merchandise, but also reimbursement for the transportation charges. Date Account Debit Credit 16 Cost of Merchandise Sold 200 Merchandise Inventory 200 The seller is owed the cost of the merchandise and the cost of the transportation. However, the seller owes those transportation charges of $20 to the shipping company. Notice above that the buyer can combine the merchandise and transportation costs into one journal entry because the buyer is getting one invoice for both from the seller. Also notice that the seller can combine both the sale and the transportation added into one journal entry and send one invoice. Also notice that the transportation cost pre-paid by the seller does not become part of the Sales account. The following transactions are
ALTERNATIVE ways of presenting those above, splitting both the buyer’s and the seller’s transaction into two journal entries. BUYER SELLER 15. Purchase 50 items on account for $10 each, terms FOB shipping. Transportation charges are $20 on account. 16. Sell 50 items on account for $10 each, terms FOB shipping. Transportation charges are $20 on account. Date Account Debit Credit Date Account Debit Credit 15 Merchandise Inventory 500 16 Accounts Receivable 500 Accounts Payable 500 Sales 500 Date Account Debit Credit Date Account Debit Credit 15 Merchandise Inventory 20 16 Accounts Receivable 20 Accounts Payable 20 Accounts Payable 20 The purchaser includes the shipping cost as part of the inventory cost and pays the seller not only the cost of the merchandise, but also reimbursement for the transportation charges. Date Account Debit Credit 16 Cost of Merchandise Sold 200 Merchandise Inventory 200 The seller is owed the cost of the merchandise and the cost of the transportation. However, the seller owes those transportation charges of $20 to the shipping company. Regardless of which alternative was used to record the purchase and to record the sale, the following transactions record payment to the vendor when purchasing and payment by the customer when selling. 11. You pay the amount invoiced to the vendor. 11. Your customer pays you the amount invoiced for the sale. Assume payment terms are 2/10, net 30 under the gross method. Account Debit Credit Account Debit Credit ▼ Accounts Payable 520 ▲ Cash 510 ▼ Cash 510 ▲ Sales Discounts 10 ▼ Merchandise Inventory 10 ▼ Accounts Receivable 510 (500 – (500 x .02)) + 20 = 510 (500 – (500 x .02)) + 20 = 510 Important: When a purchases or sales discount is involved, be sure to only take the discount on the merchandise cost or sales price, respectively, and not on the transportation cost. Accounts Summary Table - The following table defines and summarizes the new accounts for a merchandising business. ACCOUNT TYPE ACCOUNTS TO INCREASE TO DECREASE NORMAL BALANCE FINANCIAL STATEMENT CLOSE OUT? Asset (*temporary) Merchandise Inventory Purchases * Freight-in * debit credit debit Balance NO Contra Asset (*temporary) Purchases Returns * Purchases Discounts * credit debit credit Balance Sheet NO What does the term freight out refers to?Freight out is the transportation cost associated with the delivery of goods from a supplier to its customers. This cost should be charged to expense as incurred and recorded within the cost of goods sold classification on the income statement.
Which term best describes the seller paying a freight charge?The second part indicates responsibility for freight charges. “Prepaid” means the seller has paid the freight; “collect” indicates the buyer is responsible for payment.
When merchandise is shipped FOB store who is responsible for paying the transportation cost?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 is responsible for the freight cost when the terms are FOB destination quizlet?If goods are shipped FOB destination, who is responsible for the shipping costs? The seller is responsible. You just studied 61 terms!
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Under which of the following terms will the buyer be required to pay transportation costs?
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