FOB stands for Free On Board or Freight On Board when part of an invoice.
It refers to the moment where a business that is shipping products is no longer responsible for the items. FOB agreements are often a part of international shipments.
A destination always follows FOB, indicating when the seller is no longer responsible for the items. These can be FOB Shipping Point or FOB Destination.
Why is FOB on an invoice important?
FOB plays an important part in small business accounting because it clarifies the terms of the shipping agreement. It defines who pays for the shipping costs and who is responsible for a lost, stolen or damaged shipment.
FOB also shows when the sale is recorded for accounting purposes. When the item reaches the point where the seller is no longer responsible for it, the seller would record the sale. The buyer would then record this as inventory as they are now responsible for the product.
Difference between FOB shipping point and FOB destination
FOB Shipping Point means that the responsibility and ownership of the goods is transferred from the seller to the buyer at the point of origin (seller’s location).
In this situation, the seller records the sale as soon as the goods leave their warehouse/premises/factory. The buyer is then responsible for the product from this point and must cover any delivery and other associated fees. The buyer is also responsible for any damage, loss or theft and the costs they incur.
FOB Destination means that seller’s responsibility for and ownership of the goods transfers to the buyer when the goods arrive at the buyer’s location and in a satisfactory condition. You write FOB Destination with the destination city (i.e. FOB Sydney).
FOB Shipping Point is more beneficial for the seller, whereas FOB Destination is better for the buyer.
Difference between CIF and FOB
CIF stands for Cost, Insurance and Freight. Both CIF and FOB are agreements used when shipping products internationally between a seller and buyer. The biggest difference between the two is who is responsible for the items while they are being transported.
Under a CIF contract, the seller is responsible for the insurance and any other shipping costs. The seller’s responsibilities include:
- Transporting goods to the closest port
- Loading goods onto shipping vessel
- Costs of insuring goods
- Costs of shipping
However, in FOB agreements, the seller transfers responsibility to the buyer as soon as the goods leave the location of the seller or once the buyer receives the goods depending on the exact agreement.
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