فوب ( FOB ) چیست؟ به زبان انگلیسی ساده

What are FOB shipping terms?

1. Definitions of FOB shipping point and FOB destination

A computer manufacturing company sells its products and ships them across the country. It usually takes 5 days from the time a computer is shipped to the time it is delivered to the customer. During the transportation time, is the shipped computer still seller's inventory or already buyer's inventory?

The reason this question is important is because it determines when the manufacturing company, the seller, can recognize sales revenue and cost of goods sold. On the other side, the answer also dictates when the buyer can record the purchased inventory.

The answer can be obtained by looking at the shipping terms in a sales transaction. In practice, there are two general types of shipping terms:

FOB shipping point implies terms of sale under which title of goods passes to the buyer at the point of shipment. FOB shipping point is sometimes called FOB origin.

FOB destination implies terms of sale under which title of goods passes to the buyer at the point of destination.

N.B. FOB stands for free on board.

The illustration below provides a good depiction of FOB shipping point and FOB destination terms:

Illustration 1: FOB shipping point and FOB destination

From the illustration above, you can see that in the FOB shipping point scenario the title transfers to the buyer when the goods leave seller's premises: at that point the seller recognizes a sale, and the buyer recognizes a purchase. The customer usually pays for transportation and insurance when the shipping terms are FOB shipping point; the customer includes such expenditures in the cost of inventory purchased because they are considered product costs (transportation-in or freight-in costs).

In the FOB destination scenario, the title transfers to the buyer when the goods reach the buyer's premises; at that point the seller recognizes a sale, and the buyer recognizes a purchase. The seller usually pays for transportation and insurance when the shipping terms are FOB destination; the seller expenses such expenditures when they are incurred because they are considered period costs (transportation-out).

2. Example of FOB shipping point (FOB origin)

Let's assume that Manufacturer sells goods to Customer. The shipping terms are FOB shipping point. The transactions listed below took place between Manufacturer and Customer:

March 29: Manufacturer sold goods costing $15,000 to Customer at a price of $25,000. Customer incurred on account $2,000 for transportation and insurance of the goods. The time to deliver goods to Customer is 5 days:

Manufacturer	Customer
To record cost of goods sold: Dr Cost of Goods Sold 15,000 Cr Inventory 15,000 To record sales revenue: Dr Accounts Receivable 25,000 Cr Sales Revenue 25,000	To record purchase of goods: Dr Inventory 25,000 Cr Accounts Payable 25,000 To record transportation and insurance costs: Dr Inventory 2,000 Cr Accounts Payable 2,000

April 2: Customer received goods purchased from Manufacturer:

Manufacturer	Customer
No entries to be recorded.

3. Example of FOB destination

Let's use the same example, except that this time the shipping terms are FOB destination:

March 29: Manufacturer sold goods costing $15,000 to Customer at a price of $25,000. Manufacturer incurred on account $2,000 for transportation and insurance of the goods. The time to deliver goods to Customer is 5 days:

Manufacturer	Customer
To record transportation and insurance costs: Dr Selling Expenses 2,000 Cr Accounts Payable 2,000	No entries to be recorded.

April 2: Customer received goods purchased from Manufacturer:

Manufacturer	Customer
To record cost of goods sold: Dr Cost of Goods Sold 15,000 Cr Inventory 15,000 To record sales revenue: Dr Accounts Receivable 25,000 Cr Sales Revenue 25,000	To record purchase of goods: Dr Inventory 25,000 Cr Accounts Payable 25,000

4. Advanced accounting topics related to shipping terms

A few more advanced questions related to the question under discussion are reviewed below.

Transfer of Title and Risks and Rewards

To recognize a sale of goods, the seller must transfer title to the goods and all risks and rewards associated with the goods. Usually, title transfer implies the transfer of risks and rewards, so when the title is transferred, the seller can recognize a sale. However, sometimes risks and rewards are not transferred even though the title may have been. For example, if the seller sold a product to a customer under FOB shipping point terms, but during transportation the product was damaged, and the seller replaced the product at no charge to the customer, the risks and rewards associated with the product didn't transfer until the product reached the customer. In cases when the seller uses the FOB shipping point terms, however, the seller still bears the risks and rewards until the product reaches the customer: the shipping terms are, in essence, FOB destination, and the seller should not recognize a sale until the product gets to the customer.

Other Shipping Terms

FOB shipping point and FOB destination are two commonly used shipping terms. There are other shipping terms as well. For example, in international shipments, Incoterms 2000 may be used. Intecoterms 2000 provides a wide spectrum of shipping terms letting the seller and buyer determine when the title and risks and rewards are transferred, among other things. For example, the shipping term EXW (EX Works) means the seller transfers all risks and rewards associated with the goods upon shipment from their premises (e.g. factory). On the other side of the spectrum is the shipping term DDP (Delivered Duty Paid), where the seller retains risks and rewards associated with the inventory until it is delivered to a named place of destination.