Free on Board FOB Explained: Who’s Liable for What in Shipping?

Here is more detail about FOB, beginning with common transportation terms you may encounter. We will also explore steps you can take to deal with FOB issues at your business. During a site visit with a prominent shipper a high-level purchasing person called it fob (rhyming with “bob”). That highlights a need to understand how this often-misused term is defined. Knowing which arrangement is in place can help your business plan and budget for sending costs more effectively. Buyers and sellers account for them differently, and it’s not unusual for the sale contract to treat the sale differently from the ledger.

“Freight Collect” refers to the legal fact that the buyer is responsible for all freight charges. That means they are responsible for filing claims in the case of loss or damage. When the freight must be collected, the person receiving the shipment is responsible for all of the freight charges. Freight collect means that the buyer takes on all of the risks and is responsible for getting insurance and filing a claim if the products are damaged in shipping. The buyer takes responsibility for the transport cost and liability during transportation. “FOB Destination” means that the transfer completes at the buyer’s store and the seller is responsible for all of the freight costs and liability during transport.

What does FOB mean in shipping?

Inventory costs are expensive and include not only the cost of goods, but the fees to prepare inventory for sale. The amount of inventory and cost of goods on the books changes as well, depending on where the goods are and the FOB status. And of course, accepting liability for goods adds to the profits and losses, if there is damage during transit. Understanding the terminology and understanding when you’re accepting liability and ownership, is imperative. As soon as the goods arrive at the transportation site, and are placed on a delivery vehicle, or at the shipping dock, the buyer is liable for any losses or damage that occur after. The buyer would then record the sale, and consider their inventory increased.

If you are new to purchasing FOB from China, it will be beneficial for you to understand the overall shipping process and what to expect when you begin communicating with Chinese suppliers in your next production. If you would like to be sent a custom rate for your next shipment from China, request a shipping quote, and we will Accounting Services and Bookkeeping Services Outsourced Expertise send you a detailed offer. Of this total, 95 million tons were export goods, 246 million tons were imported goods, and the remaining 544 million tons were moved by water within the United States. BTS projects the amount of cargo transport that will increase each year at around 1.4% until 2045,” According to data from the U.S.

Incoterms

However, depending on the terms outlined in the sale contract, there can be two types of FOBs that affect the seller and buyer differently, with the primary difference between the two types being the point of transfer. With FOB Origin, the seller is responsible for transporting the goods from the origin point (warehouse) to the shipping point. The responsibility transfers to the buyer as soon as the goods are loaded onto the nominated shipping vessel. The buyer takes responsibility for the remainder of the transport, including the delivery to the destination port.

The buyer then takes responsibility for the goods once they have arrived at the named port. Company A buys watches from Vietnam and signs a FOB shipping point agreement. The https://accounting-services.net/small-business-bookkeeping-services/ cargo arrives at the receiving dock and the buyer takes ownership and liability. The buyer is responsible, even though the watches were damaged before arriving on U.S. soil.

What does FOB (Free on Board) mean in shipping?

CIF (Cost, Insurance, and Freight) and FOB (Free on Board) are two widely used INCOTERM agreements. With a CIF agreement, the seller pays costs and assumes liability until the goods reach the port of destination chosen by the buyer. FOB is a common term used for all types of shipping, both domestic and international. Shipping orders and contracts often describe the time and place of delivery, payment, when the risk of loss shifts from the seller to the buyer, and which party pays the costs of freight and insurance.

• The term, which was defined as part of the International Chamber of Commerce’s (ICC), is the most common agreement when shipping internationally.
• However, you should not assume that you are responsible for the shipping costs and liability just because you see FOB on an invoice or agreement.
• FOB is important for a number of reasons, but most importantly, shippers and carriers need to understand FOB designations in damage situations.
• Only the most enthusiastic lawyer could watch with satisfaction the spectacle of liabilities shifting uneasily as the cargo sways at the end of a derrick across a notional perpendicular projecting from the ship’s rail.
• These provisions outline the point when responsibility for risk of loss shifts to the buyer, who covers the freight charges, delivery location and time, and the payment terms for the shipments.
• Identifying both terms will determine ownership, risk, and logistics cost.
• The vendor-client transaction defines the FOB terms in the purchase order.