FOB destination – What is FOB destination?
Definition: FOB (freight on board) destination is a form of shipping terms that means the legal title to the goods remains with the seller until the goods reach the location of the buyer.
Terms indicating that the seller will incur the delivery expense to get the goods to the destination. With terms of FOB destination the title to the goods usually passes from the buyer to the seller at the destination. This means that goods in transit should be reported as inventory by the seller, since technically the sale does not occur until the goods reach the destination.
The point of FOB destination is to transfer the title to the goods to the buyer as soon as they’ve arrived at the buyer’s location. Only once goods have arrived at the final shipping destination should they be reported as a purchase and as inventory by the buyer, and as a sale and an increase in accounts receivable by the seller.
When a sale is made, accountants must record revenue for the merchandiser and manufacturer. The term FOB Destination tells the accountant that the sale officially occurs when it arrives at the destination (the buyer’s receiving dock).
When accounting for shipping costs, accountants assume follow the shipping terms to determine who is responsible for this expense. If the sale occurs when the goods reach their final destination (FOB Destination), then the seller is responsible for the cost of transporting the goods to the buyer’s unloading dock and will record this cost as a delivery expense.