What are FOB shipping terms?

3. Example of FOB destination

Let's use the same example, except that this time the shipping terms are FOB destination:

March 29: Manufacturer sold goods costing $15,000 to Customer at a price of $25,000. Manufacturer incurred on account $2,000 for transportation and insurance of the goods. The time to deliver goods to Customer is 5 days:

Manufacturer

Customer

To record transportation and insurance costs:
Dr Selling Expenses   2,000
Cr Accounts Payable  2,000

No entries to be recorded.

April 2: Customer received goods purchased from Manufacturer:

Manufacturer

Customer

To record cost of goods sold:
Dr Cost of Goods Sold  15,000
Cr Inventory                  15,000


To record sales revenue:
Dr Accounts Receivable 25,000
Cr Sales Revenue          25,000

To record purchase of goods:
Dr Inventory                25,000
Cr Accounts Payable  25,000

4. Advanced accounting topics related to shipping terms

A few more advanced questions related to the question under discussion are reviewed below.

Transfer of Title and Risks and Rewards

To recognize a sale of goods, the seller must transfer title to the goods and all risks and rewards associated with the goods. Usually, title transfer implies the transfer of risks and rewards, so when the title is transferred, the seller can recognize a sale. However, sometimes risks and rewards are not transferred even though the title may have been. For example, if the seller sold a product to a customer under FOB shipping point terms, but during transportation the product was damaged, and the seller replaced the product at no charge to the customer, the risks and rewards associated with the product didn't transfer until the product reached the customer. In cases when the seller uses the FOB shipping point terms, however, the seller still bears the risks and rewards until the product reaches the customer: the shipping terms are, in essence, FOB destination, and the seller should not recognize a sale until the product gets to the customer.

Other Shipping Terms

FOB shipping point and FOB destination are two commonly used shipping terms. There are other shipping terms as well. For example, in international shipments, Incoterms 2000 may be used. Intecoterms 2000 provides a wide spectrum of shipping terms letting the seller and buyer determine when the title and risks and rewards are transferred, among other things. For example, the shipping term EXW (EX Works) means the seller transfers all risks and rewards associated with the goods upon shipment from their premises (e.g. factory). On the other side of the spectrum is the shipping term DDP (Delivered Duty Paid), where the seller retains risks and rewards associated with the inventory until it is delivered to a named place of destination.

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