Business, Legal & Accounting Glossary
FOB, is an abbreviation for Free On Board. The term is commonly used when shipping goods, to indicate who pays loading and transportation costs, and/or the point at which the responsibility and ownership of the goods transfers from shipper to buyer.
Under the Incoterm standard, FOB stands for “Free On Board”. Indicating “FOB” means that the seller pays for transportation of the goods to the port of shipment, plus loading costs. The buyer pays freight, insurance, unloading costs and transportation from the arrival port to the final destination. The passing of risks occurs when the goods pass the ship’s rail at the port of shipment. Internationally the term specifies the port of loading, e.g., “FOB New York” or “FOB Vancouver.”
Domestically within the United States and Canada, “FOB” is sometimes still used as per the long-discontinued “Foreign Trade Definitions” of 1941, with at least four different precise meanings.
The term is used in two common phrases, “FOB shipping point” (origin) and “FOB destination,” to distinguish when the title of goods passes from the seller to the buyer. Under the terms of “FOB shipping point,” the title of the goods passes to the buyer at the shipping point. Similarly, under the terms of “FOB destination”, the title of the goods passes to the buyer when the goods arrive at their destination. The distinction is important because it determines who pays for the shipping costs of the merchandise: whoever holds the title to the merchandise at the time of its shipping pays for its transportation costs unless otherwise noted (e.g., freight prepaid or freight collect). Also, it is important that if the shipment is damaged while travelling the owner must file the freight claim.
When counting inventory, merchandise in transit plays a crucial role depending on whether it is added to the company’s balance sheet. Items under “FOB shipping point/destination” generally do not appear in stock listings at year ends. However, they should be included as the risk and rewards of ownership have transferred to the buyer.
A trade term requiring the seller to deliver goods on board a vessel designated by the buyer. The seller fulfils its obligations to deliver when the goods have passed over the ship’s rail.
When used in trade terms, the word “free” means the seller has an obligation to deliver goods to a named place for transfer to a carrier.
With the advent of e-commerce, most commercial electronic transactions occur under the terms of “FOB shipping point” or “FCA shipping point”. Most analysts see this as a disadvantage of online shopping compared to traditional in-person purchasing, where “FOB destination” is more prevalent.
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This glossary post was last updated: 28th April, 2020 | 13 Views.