Significance of FOB Shipping Point and FOB Destination
The terms FOB shipping point and FOB destination have significance in accounting because they determine the following:
- When a sale of goods and the related receivable occur
- When the purchase of goods and the related liability occur
- Whether the seller or buyer pays the shipping costs
If the seller of goods quotes a price that is FOB shipping point, the sale takes place when the seller puts the goods on a common carrier at the seller's dock. Therefore, when the goods are being transported to the buyer, they are owned by the buyer and the buyer is responsible for the shipping costs.
If a seller of goods quotes a price that is FOB destination, the sale takes place when they are unloaded at the buyer's destination. This means that the seller owns the goods while they are on the truck and the seller is responsible for the shipping costs.
Example of FOB Shipping Point
Assume that a seller quoted a price of $900 FOB shipping point and the seller loaded the goods onto a common carrier on December 30. Also assume that the goods are in transit until they arrive at the buyer's location on January 2. On December 30, the seller should record a sale, an account receivable, and a reduction in its inventory.
The buyer should record the purchase, the account payable, and the increase in its inventory as of December 30 (the date that the purchase took place). Since the goods on the truck belong to the buyer, the buyer should pay the shipping costs. These shipping costs will be an additional cost of the goods purchased.
Example of FOB Destination
Now assume that a seller quoted $975 FOB destination and the seller loaded the goods onto a common carrier on December 30. Also assume that the goods are on the truck until January 2, when they are unloaded at the buyer's location. On December 31, the goods were owned by the seller. Therefore, the seller should continue to report these goods in its inventory until January 2. The seller will be responsible for the shipping costs, which will be an expense in January when the sale is reported.
The buyer records the purchase, accounts payable, and the increase in inventory on January 2 when the buyer becomes the owner of the goods.