What is FOB Shipping Point and FOB Destination?



FOB Shipping Point and FOB Destination are two shipping terms that the buyer of goods and the seller of goods could enter into if the goods purchased need to be delivered via a carrier. These shipping terms helps determine whether inventory should be recorded in the books or not and whether delivery costs should be recognized.

What is FOB Shipping Point and FOB Destination?

  1. FOB shipping point – Under this shipping agreement, ownership over the merchandise inventory purchased is transferred to the buyer upon shipment. Therefore, sales and accounts receivables are recognized upon shipment. When the goods are still in transit, the buyer already has title to the goods.
  2. FOB destination – Under this shipping agreement, ownership over the purchased inventory is transferred when the buyer receives the goods. Therefore, sales and accounts receivable are only recognized when the buyer already has the inventory on hand.

Sample Problem 1

For instance, assume that a seller ships goods on December 29, 20x7 and received by the buyer on January 2, 20x8. If the sales term is FOB shipping point, accounts receivable and sales will be recognized as of December 29, 20x7 since ownership is transferred to the buyer upon shipment. Consequently, the goods are excluded from the seller’s year-end inventory.

On the other hand, if the sales term is FOB destination, accounts receivable and sales will be recognized only on January 2, 20x8 since ownership is transferred only when the buyer receives the goods. Consequently, the goods in transit are included in the seller’s year-end inventory.

Freight Prepaid and Freight Collect

Another matter that should addressed is the accounting for freight charges. Relevant terms follow:

  1. Freight collect – means freight is not yet paid upon shipment. The carrier will collect the shipping cost from the buyer upon delivery. Thus, freight is actually paid by the buyer but this does not mean that the buyer is the one who is supposed to pay for the freight charges.
  2. Freight prepaid – means freight is already paid in advance by the seller before shipment. Thus freight is actually paid by the seller but this does not mean that the seller is the one who is supposed to pay for the freight charges.

As a rule the entity who owns the goods being shipped should pay for the shipping costs. No special accounting necessary if the term of the sales contract is either FOB shipping point, freight collect or FOB destination, freight prepaid since the owner of the goods in transit is also the one who pays for the freight charges.

Special accounting arises when the term of the sale contract is either (a) FOB shipping point, freight prepaid or (b) FOB destination, freight collect.

Under FOB shipping point, freight prepaid, the buyer owns the goods being shipped but the seller already paid the shipping costs. Under FOB destination, freight collect, the seller owns the goods being shipped but the carrier will be collecting the shipping costs from the buyer.

Sample Problem 2

On December 27, 20x1, JOVY Co. received sale order for a credit sale of goods with selling price of P2,000. The goods were shipped by ABC on December 31, 20x1 and were received by the buyer on January 2, 20x2. Related shipping cost amounted to P20. JOVY collected the receivable on January 5, 20x2. Prepare the pertinent journal entries on the books of JOVY under different terms of shipment.



Journal Entries

FOB shipping point, freight collect.

FOB shipping point, freight collect.FOB destination, freight prepaid.

FOB destination, freight prepaid.

For proper matching of cost with revenue, the freight paid is deferred and charged to expense only when the related revenue is recognized.

FOB shipping point, freight prepaid.

FOB shipping point, freight prepaid.

Note that the seller does not recognize freight-out for the freight paid because the buyer is the one who is supposed to pay the shipping costs. Further, accounts receivable is increased by the shipping costs paid by the seller to the carrier

FOB destination, freight collect.

FOB destination, freight collect.

Note that the seller debits freight-out for the shipping costs paid by the buyer because the seller is the one who is supposed to pay for the shipping costs. The seller will later on reimburse the shipping costs by a decreased collection of receivables.