FOB Shipping Point

FOB shipping point, short for "free on board shipping point" and sometimes called FOB origin, is a shipping term under which ownership of goods and the risk of loss pass from seller to buyer at the moment the seller delivers them to the carrier. From then on, the goods belong to the buyer, even while they are still travelling. The buyer usually pays the freight and is the party that must claim against the carrier or insurer if anything is lost or damaged.

The term is the opposite of FOB destination, under which the seller keeps title until the goods arrive. The distinction decides who records the goods as inventory while they are in transit and, therefore, in which period a sale or purchase appears. In US domestic contracts FOB terms rest on the Uniform Commercial Code; in international trade, the Incoterms rule FOB applies only to sea and inland waterway shipments, and FCA (free carrier) is the closer match for container or road freight.

Because the buyer owns the goods during transport, it normally pays the carrier. The terms are often written "FOB shipping point, freight collect." For the buyer, freight paid on incoming goods is part of the cost of acquiring them, so it is added to inventory, often through a separate freight-in account, and becomes part of cost of goods sold when the goods are sold. It is not treated as a selling expense. Where the seller pays the carrier as a convenience and bills the buyer, the terms read "freight prepaid and add," and the buyer still bears the cost.

Under ASC 606 and IFRS 15, revenue is recognized when control transfers to the customer. With FOB shipping point terms, legal title and risk normally pass on shipment, so the seller usually recognizes revenue when goods leave its dock, provided no other obligations remain. The buyer records the purchase and the related accounts payable on the same date.

For example, a distributor ships goods with a sales price of $25,000 and a cost of $15,000 to a retailer on 30 June, FOB shipping point, and the retailer pays $600 of freight. The goods arrive on 5 July. At its 30 June year end:

• The distributor records a sale of $25,000 and accounts receivable of $25,000, and moves $15,000 from inventory to cost of goods sold.
• The retailer records $25,000 of inventory in transit and a $25,000 payable, even though the goods are not yet in its store.
• When the retailer pays the carrier, it adds the $600 to inventory, giving a total inventory cost of $25,600.

At period end, goods shipped FOB shipping point but not yet received belong in the buyer's inventory and must be added to its physical count, while the seller excludes them. A buyer that forgets them understates inventory and payables; a seller that counts them twice overstates inventory. Auditors test this by matching bills of lading and receiving reports to invoices around the cut-off date, part of the wider work done during the month-end close and year-end close.

Shipping terms do not override other parts of a contract. If the seller has also promised installation or training, or if the customer can return goods freely, revenue may need to be deferred or reduced even under FOB shipping point. Equally, arrangements such as bill-and-hold sales, in which goods are invoiced but kept at the seller's site, need careful review before revenue is recognized.

Sellers tend to prefer FOB shipping point because their risk ends earlier and they can recognize revenue sooner. Buyers who accept it should make sure they have transit insurance, since a lost shipment is their loss. Large buyers often negotiate FOB shipping point deliberately so they can use their own carriers and freight contracts, sometimes at lower rates. Companies shipping abroad should state the proper Incoterms rule and named place, since domestic FOB wording can be misread in other jurisdictions, and many rely on a freight forwarder to manage the documentation.