FOB destination
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FOB destination - (Free 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. Terms announcing that the seller will acquire the delivery expense to get the goods to the destination. With terms of FOB destination, the title to the goods usually passes from the seller to the buyer at the destination. This means that goods in shipment should be reported as inventory by the seller since technically the sale does not occur until the goods reach the destination. 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. Generalize FOB destination means that goods are shipped to their destination without charge to the buyer; the seller is responsible for paying the freight charges[1][2][3][4][5].
The term Free On Board - FOB is the Incoterm of F's group, it means that sellers obligated to provide issues connected with delivery commodities to the carrier; the term is used with an identified physical location to determine, the responsibility and basis for payment of freight charges, and the point at which title for the shipment passes from the seller to the buyer[6].
Variations of FOB destination
FOB Destination Unless qualified in the FOB clause, the seller is responsible for freight charges. Division the types of FOB destination has been created to divide between the seller and the buyers issues connected with owning the goods and paying the charges. There are four variations on FOB destination terms[7][8][9][10]:
- FOB Destination, Freight Collect - the buyer pays and bears the freight charges; the buyer pays the freight charges at the time of receipt, though the supplier still owns the goods while they are in transit; seller incurs freight charges, and buyer initially pays freight charges; „ownership of the goods is transferred when the goods reach destination or the buyer’s place; While the goods are in transit, the seller is still the owner who should carry freight-out in his books”
- FOB Destination, Freight Prepaid and Allowed - the seller pays and bears the freight charges; the seller pays and bears the freight charges and owns the goods while they are in shipment; title passes at the buyer's location
- FOB Destination, Freight Collect and Allowed - the buyer pays freight charges and deducts the amount from Seller's invoice; the buyer pays for the freight costs but deducts the cost from the supplier's invoice; the seller still owns the goods while they are in shipment
- FOB Destination, Freight Prepaid and Add - the seller pays the freight and adds the freight charges to its invoice to the buyer; the seller pays the freight charges but bills them to the customer; the seller owns the goods while they are in transit; title passes at the buyer's location
| Names | Pays freight charges | Bears freight charges | Owns goods in transit | Files claims (if any) |
|---|---|---|---|---|
| FOB Destination, Freight Collect | Buyer | Buyer | Seller | Seller |
| FOB Destination, Freight Prepaid | Seller | Seller | Seller | Seller |
| FOB Destination, Freight Collect & Allow | Buyer (and deducts freight charges from invoice) | Seller | Seller | Seller |
| FOB Destination freight prepaid and Add | Seller (and deducts freight charges from invoice) | Buyer | Seller | Seller |
Examples of FOB destination
- A clothing retailer in New York orders a shipment of shoes from a wholesaler in Los Angeles. The wholesaler ships the shoes with a FOB destination agreement, meaning they cover the cost of freight to New York and the retailer takes ownership of the shoes once they arrive.
- A local electronics store orders a new shipment of TV sets from a manufacturer in China. The manufacturer agrees to ship the TVs with a FOB destination agreement, meaning they cover the cost of freight to the store and the store takes ownership of the TVs once they arrive.
- A restaurant owner in San Francisco orders a shipment of fresh seafood from a supplier in Seattle. The supplier ships the seafood with a FOB destination agreement, meaning they cover the cost of freight to San Francisco and the restaurant owner takes ownership of the seafood once it arrives.
Advantages of FOB destination
The FOB destination shipping term has a number of advantages for both the buyer and the seller. These include:
- The buyer does not have to pay for the delivery cost of goods, which can be a substantial saving.
- The seller is able to maintain control over the goods until they reach the destination. This can help to ensure that goods are received in the expected condition and that the buyer is satisfied with the goods.
- The buyer is able to take possession of the goods as soon as they arrive at the destination, reducing the time before they are able to use the goods.
- The seller is able to accurately track the location of the goods while they are in transit, allowing them to provide accurate updates to the buyer.
- The seller can also receive payment for the goods as soon as they arrive at the destination, providing them with quick cash-flow.
Limitations of FOB destination
- The main limitation of FOB destination is that the seller bears all freight costs and other charges related to shipping. This can be a burden on the seller, especially if they are located far away from the buyer, which can lead to increased expenses.
- The seller is also responsible for insuring the goods during transit, which can add to their costs and liability.
- FOB destination may also lead to delays in payments for goods as the payment will not be made until the buyer has received the goods and title has been transferred to them.
- There can be a risk of the goods being damaged or lost in transit, which can lead to disputes between the seller and the buyer. The seller may be liable for any losses.
- Finally, there is the risk that the goods may not be accepted by the buyer due to incorrect specifications or quality. The seller may have to bear the cost of returning the goods or may even have to write off the cost of the goods.
One other approach related to FOB Destination is as follows:
- FOB Origin – (Free on Board Origin) Under this approach, the buyer takes possession of the goods at the seller’s location, and is responsible for all costs associated with the shipment to the buyer’s destination.
- Ex Works (EXW) – Under this approach, the seller is responsible for delivering goods to the seller’s location and the buyer is responsible for all costs associated with the shipment to the buyer’s destination.
- Delivered Duty Paid (DDP) – Under this approach, the seller is responsible for all costs associated with delivering goods to the buyer’s destination, including duties and taxes.
In summary, FOB Destination is an approach in which the seller is responsible for paying the freight charges to the buyer’s destination. Other approaches related to FOB Destination include FOB Origin, Ex Works, and Delivered Duty Paid.
Footnotes
References
- Collier M., (2017). New World of Freight Brokering
- Federal Acquisition Regulations System, (1987). Code of Federal Regulations, the Office of the Federal Register National Archives and Records Administration, vol.48
- Hinkelman E.G., (2010). Dictionary of international trade 8th Edition, World Trade Press
- McDonald S., (2009). Materials Management: An Executive's Supply Chain Guide, John Wiley&Sons, New Jersey
- Prokop D., (2014). Modes and Markets, "The Business of Transportation", Praeger, vol. 1
- Rex Bookstore, (1994). Accounting Principles and Procedures for a Sole Proprietorship, Rex Bookstore
Author: Natalia Zajko
