FOB stands for "free on board" or "freight on board." The shipping terms that follow "FOB" dictate who pays for shipping and when the ownership of goods is transferred. The FOB shipping terms have both legal and accounting implications for the buyer and seller.
For international shipments, the freight term FOB stands for "free on board." For domestic shipments, FOB can stand for either "free on board" or "freight on board." Either way, the meaning is the same.
FOB is a freight term that indicates when the ownership of goods being shipped transfers to the buyer and who pays the shipment freight. "Freight collect" means that the buyer pays the shipping and "Freight prepaid" means the seller pays the shipping.
FOB Destination and FOB Shipping Point
FOB is usually followed by the term "destination" or "shipping point." FOB destination or FOB buyer's warehouse means that the ownership of goods transfers when the goods actually reach the seller. This means that until the seller or a third party shipper delivers the goods to the buyer's property, the seller still owns the goods.
The terms FOB origin and FOB shipping point mean the ownership for the goods transfer as soon as the seller ships the goods. As soon as the goods enter transit, the buyer owns them.
Marking a shipment as FOB shipping point or FOB destination can help resolve legal disputes about goods damaged or lost in transit. If goods are in transit and the shipment was FOB destination, the seller is liable for the damaged goods and must work with any third party shipper to get a refund or resolution.
If the damaged shipment was FOB shipping point, seeking a refund from the shipper is the responsibility of the buyer. Likewise, if goods are shipped FOB destination and they never arrive at the buyer's property, the seller is responsible for sending replacement goods to complete the sale. If this happens under FOB shipping point, the buyer is out of luck.
FOB shipping terms are important for company accountants to know and understand. That's because a company is only allowed to record revenue when the ownership of goods has completely transferred to a seller. When goods are sent FOB destination, the seller can't record sales revenue until the goods actually reach the buyer.
This becomes a significant issue at the end of a reporting period when the company wants to report sales revenue for financial statements. At these cut-off periods, operations personnel and accountants must investigate the delivery status of shipped goods to determine revenue.