FOB shipping point plays a different role for buyers and sellers. Learn more details about the concept and how it applies to accounting principles.
FOB (free on board) shipping point is a term used in the shipping of goods and services. It refers to the earliest point at which title and risk of loss pass from the seller (or exporter) to the buyer (or importer). When the shipment leaves a warehouse, the buyer assumes its responsibility and needs to pay the delivery charges.
If there are any damages to the cargo enroute, the buyer needs to take relevant measures like filing for reimbursement claims. Since the shipment becomes the buyer's responsibility, the seller has no further role in the process.
Let’s understand more details about the FOB shipping point, their role in invoices, and how you can automate those invoices.
Let us assume that a company orders office stationery for their newly launched office in the city. They get into a contract with the supplier and agree to specific terms. One of the terms in the agreement will be that the seller will deliver the goods on a FOB shipping point basis. What it means is that the supplier is only responsible for ensuring the supplies get delivered to the origin point.
It is the primary transportation point where the company will assume responsibility for the office stationery they have ordered. The sale record will only happen when the supplier hands over the supplies for transportation at the FOB shipping point. The official accounts entry will reduce the inventory balance and add a new item to accounts receivable.
The company will assume responsibility for the office supplies even as they are yet to receive possession of the goods. The company will also have an open accounts payable balance and will soon mention office supplies in its financial statements. It does not matter how long it takes for the shipment to arrive at its destination.
Here are some terms related to FOB shipping point that you need to consider.
Once the goods reach the origin point, the buyer needs to assume responsibility for the consignment. On behalf of buyers, sellers usually pay upfront shipment costs and compensate the buyer. Even if the seller pays for the shipment, the buyer remains responsible for the goods.
When the shipment arrives at the origin, the buyer needs to attain responsibility for them. Even if the seller pays the shipping charges initially, they may charge the customer later. The shipping costs can be a part of the same invoice.
The seller owns the responsibility for the goods when they are in transit. They also need to take responsibility for the shipment till it reaches its destination. Buyers need to bear the shipping costs here.
The seller charges buyers for the shipping charges in the invoice. However, the seller also manages the safe delivery of the shipment to its destination. The buyer will pay for the shipping charges along with the rest of the shipment amount.
FOB destination works in the opposite manner than FOB shipping point. When we consider the FOB shipping point, the ownership of the shipment gets transferred from the buyer to the seller at the loading point of the goods. However, the ownership title in the FOB destination gets transferred from the seller to the buyer when the buyer receives the shipment at the unloading dock.
The seller holds a complete charge over the shipment when it is in transit and needs to ensure its safe delivery. A company working in London may order office supplies from a Germany-based vendor. If the supplier fails to deliver the shipment to the London-based company, they hold complete responsibility for the failed shipment. They will have to reship the consignment or reimburse the company.
Here are some vital differences that will help you differentiate between the two in a better way.
The shipment ownership from the buyer to the seller gets transferred at different times at the FOB shipping point and FOB destination. FOB shipping point involves ownership transfer when the seller delivers the goods at the origin point. Buyers need to assume responsibility for the shipment from this point and need to bear risks during the transportation.
FOB destination holds the seller responsible for the shipment’s transportation to the unloading dock of the buyer. The seller needs to take care of the safe delivery of the shipment. If there are issues during the transit, the seller may even have to compensate the buyer based on the agreed terms.
In the FOB shipping point, when the buyer gets the responsibility of the goods from the buyer, they can make an entry in their inventory list. The seller can also record a sale in their accounts when they transfer the ownership to the buyer.
The accounting rules change when it comes to FOB destination. Sellers can consider a sale complete and record it in their accounts book only when they deliver the shipment to the buyer. Similarly, buyers can update their inventory only after they receive the shipment. Entries and updates in the FOB destination take much more time than at the FOB shipping point.
Sellers remain responsible for the shipping costs at the FOB shipping point only till the goods arrive at the point of origin. From that point, buyers need to take care of the transportation and other costs like taxes during the delivery.
In FOB destination, sellers take care of all the costs till they transport the goods to the unloading dock of the buyer. Beyond the unloading point, buyers need to take responsibility and bear any related costs.
The accounting systems of companies get impacted based on the time the buyer assumes responsibility for the shipment. While the shipping costs also get determined only after the transfer of ownership, it also affects inventory and accounting records. The seller can record a sale as soon as they ship the goods to their loading dock.
Similarly, the buyer needs to update their inventory and make a note of the incoming shipment. They need to update the records even if they are yet to receive the shipment.
FOB is important for business accounting in several ways. Let’s look at how.
Dictates the terms for shipping agreement
FOB clearly indicates whether the buyer or the seller is responsible for bearing the shipping costs. If the seller is responsible, it also specifies terms for reshipment in case of damages, losses, and thefts.
Helps record sale and inventory
Sellers can record a sale when they deliver the shipment to the point of origin, where the buyer assumes the responsibility for the goods. Similarly, buyers need to record the goods in their inventory at that point. Even if the shipment takes a week or two to arrive, the inventory remains an asset in the accounts.
CIF (Cost, Insurance, and Freight) is another shipping agreement similar to FOB. Businesses use it when there are transactions across international borders. The primary difference between the two is the ownership of the shipment when it is in transit.
When businesses get into a CIF agreement, the seller remains responsible for all the costs related to shipping the goods. It includes everything from customs, insurance, etc. Sellers have a major role to play here as they have to transport the goods to the loading point and ensure it gets loaded for shipment.
Besides, they also need to pay for the shipping costs and insurance charges. As we already have seen with FOB, sellers do not assume much responsibility unless it is the FOB destination. Even when sellers pay for the shipment charges, they can get reimbursed by buyers based on mutual agreement.
The need to automate the processing of FOB shipping documents is a growing concern in the logistics industry. It is because of the high volume of transactions that occur daily and the manual handling of related documents.
This can lead to errors, which directly impact efficiency and productivity. In addition, it increases the risk of human error and can lead to delays due to lost or misplaced documents. These delays can cause delays in payment and customer satisfaction issues.
With an automated system, the work can be done more quickly and accurately. It helps lower costs by reducing delays in delivery times, which means customers will receive their shipments faster than they would otherwise.
An Intelligent Document Processing (IDP) platform like VisionERA can help you automate the processing of FOB shipping documents. You can extract relevant information in minutes from the input of all types. The platform analyses the extracted data in no time to generate relevant insights.
VisionERA will allow your team to process documents 3x faster and help your team become 20x productive. The time saved from doing menial tasks can be utilized better on other critical activities that help improve your bottom line.
Contact us today to know more details about VisionERA.
* Who pays the shipping charges in FOB shipping point?
The seller needs to pay for the transportation costs till the point of origin, where the buyer assumes the responsibility for the shipment. From that point, buyers need to bear all the expenses for further transport.
* Who holds the risk in FOB shipping point?
Sellers hold all the responsibility for goods till the time they reach the point of origin. Buyers then assume the responsibility once they receive the possession. They are also responsible for damages to the shipment enroute.
* Does FOB destination favour buyers?
FOB destination helps buyers as they are not responsible for the transport of goods. Instead, the seller holds complete accountability and needs to pay shipping costs. Buyers can also inspect the consignment and check for damages before clearing the payments.