FOB destination – What is FOB destination?
‘FOB (Freight On Board) Destination’ is a shipping term that means that the legal title to the goods remains with the seller until the goods reach the location of the buyer
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The FOB destination is, essentially, the location where the actual sale of goods occurs and ownership changes hand from the seller to the buyer. This is important for the accounts, as it dictates when the amounts are entered in the records.
The FOB destination outlines 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 alternative terms for recording the sale in the records falls under FOB shipping point, which indicates that the sale is recorded when the seller ships the goods.
FOB Destination in accounting
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).
Shipping & freight costs in FOB Destination
The FOB Destination terms also apply to the cost of shipping and the responsibility for the goods. This means that the seller is the responsible party and must undertake the cost of any damages or extra fees during the delivery process.
When it comes to the cost of shipping, 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.