FOB meaning in Business – The FOB is an international shipping term which means “free on board” or “freight on board.” There are international rules for FOB. The International Chamber of Commerce (ICC) defines these rules. These rules define who is responsible for the goods during their sea transport. On the other hand, it also states who will need to bear the cost if anything goes wrong during shipment.
In this article, you learn about the meaning of FOB in business and how it works for businesses. Apart from that, we will discuss the significance of FOB in sea transport. Furthermore, we will take a look at the terms FOB Shipping Point and FOB Destination. Finally, you will learn the impact of FOB on accounting. Hence, to learn more about FOB (Free on Board), read on through to the end of the article.
What Is FOB Meaning In Business?
FOB (Free on Board) is a rule of shipping that businesses recognize during national and international shipping through sea. The International Chamber of Commerce (ICC) created this rule. It shows when a buyer or a seller of a good is liable for goods that need to be transported by sea.
According to Shopify.com,
“FOB status says who will take responsibility for a shipment from its port of origin to its destination port. It indicates the point at which the title of the goods transfers from the seller to the buyer and, therefore, who needs to cover the costs of transit and deal with any issues. FOB rules apply to shipments delivered by sea and inland waterways. Air, rail, and road freight are covered under different ICC rules.”
It basically defines a point in the supply chain when a buyer or seller of the good becomes liable for its transport. Hence, the purchase order of the goods between the buyer and seller contains the terms of FOB. These terms help both parties and even third parties to find out transportation costs, risks, and ownership of the goods.
FOB (Free On Board): How Does It Work?
According to Investopedia FOB meaning In business described as:
“The vendor-client transaction defines the FOB terms in the purchase order. FOB status does not determine ownership, which is determined in the bill of sale or agreement between the buyer and seller, but defines which party takes responsibility for the shipment, whether at Origin, where the shipment begins, or at Destination, where the shipment ends.”
The FOB is a common term that is essential for use during shipping processes. This applies to both domestic and international shipping. Many shipping orders and contracts consist of the description of time, place, delivery location, payment, and other aspects. Furthermore, these contracts also describe when the risk of loss of goods shifts from the seller of the goods to the buyer. There is also information related to which party pays the cost of freight and insurance.
Each party in a transaction agrees beforehand to the FOB document. This allows a smooth transfer of goods from the client to the vendor.
FOB (Free On Board): Shipping Point Vs. Destination
Corporate Finance Institute,
“If the Freight On Board is indicated as “FOB delivered,” the seller or shipper will be wholly responsible for all the costs involved in transporting the consignment. Where the FOB terms of sale are indicated as “FOB Origin,” the buyer is responsible for the costs involved in transporting the goods from the seller’s warehouse to the final destination.”
On the one hand, FOB Shipping Point (also called FOB Origin) indicates that the buyer of the goods accepts ownership of the goods at the shipment point. Furthermore, the buyer also assumes all risks of the goods once the seller ships the goods. Basically, in this case, the buyer is responsible for the goods (in case of damage or loss during transit).
On the other hand, “FOB Destination” meaning in business is that the seller of the product has the responsibility for the goods. The seller here takes full responsibility during transit until the goods reach the buyer.
In shipping documents and contracts, you will find the term FOB along with the name of the location in parentheses. This location can either be the origin port or the destination port. The location determines who is responsible for the goods in the shipment. If the location is the origin port (of the seller), then the seller takes responsibility. However, if the location is the destination port (of the buyer), then the buyer takes responsibility for the goods.
FOB Meaning In Business And Its Impact On Accounting
The cost of shipping depends on the status of FOB. Whichever party is responsible for transit pays the cost of shipping. However, apart from these costs, the terms of FOB also affect when and how a business will account for its goods in its inventory.
If the shipment denotes FOB shipping point, the sale will be complete once the shipment carrier gets the goods. Here, the seller will record the sale of the goods immediately. Furthermore, in this case, the buyer of the goods will record the goods as inventory, despite the fact they have not received the goods.
If the shipment denotes FOB destination, then the seller will not be able to record the sale unless the goods reach the location of the buyer. Hence, the buyer will not be able to add the goods to the inventory until they inspect the goods after their arrival.
Wrapping Up
Hope this article was helpful for you in getting a better idea of the FOB meaning in business. You can see from here that FOB is a document or a shipping contract that tells who is responsible for the goods. The International Chamber of Commerce protects the rules of FOB. In the FOB destination, the buyer is responsible for the goods. In FOB shipment, the seller is responsible.
The term basically defines a point in the supply chain in the document. The terms of FOB impact inventory, cost of shipping, and insurance costs. Hence, it has a strong impact on accounting processes. Do you have any more information to add? Consider doing so in the comments section below.
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