Responsibility for the goods only transfers to the buyer or receiver when the ship reaches the designated destination port. The buyer is then responsible for unloading costs and any further transportation costs to the final destination. Both cost and freight and free on board are legal terms in international trade. You will see these terms as part of the International Chamber of Commerce (ICC)’s collection of global commerce terms, known as Incoterms. 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.

Transfer of Ownership

• Even so, buyers sometimes prefer CIF contracts because of the convenience of not dealing with any risks, claims, or freight issues while the goods are transported.
• Its smart new technology skips hefty international transfer fees by connecting local bank accounts all around the world.
• Depending on the agreement with your supplier, your goods may be considered delivered at any point between the port of destination and your final delivery address.
• Unlike FOB shipping, the supplier is not required to ensure the safe movement from port to ship.
• The concept, outlined in the Incoterms list by the International Chamber of Commerce, streamlines shipping contracts and facilitates trade negotiations.
• Check out this guide to learn about the different invoice types businesses can send and receive.
• These shipping firms generally have the contacts and know-how to speed shipments along and get better prices.

For sellers who deal with delivery — and sales taxes — FOB is all about shipping. For FOB Shipping Point agreements, the buyer assumes the risk almost immediately after the transaction starts, which can be unnerving, especially for high-value goods or volatile shipping routes. For FOB Destination Point agreements, ownership transfers at the opposite end of the journey.

What is the Difference Between FOB and CIF?

Responsibility for the goods is with the seller until the goods are loaded on board the ship. Essentially, when the seller delivers the goods and ships them, they’re taking care of all the transportation costs up to the final destination. This often involves specifying in the shipping documents that freight is prepaid. In FOB shipping points, if the terms include “FOB origin, freight collect,” the buyer pays for freight costs. If the terms include “FOB origin, freight prepaid,” the buyer is responsible for the goods at the point of origin, but the seller pays the transportation costs.

What is the Difference Between FOB Shipping Point and FOB Destination?

The term “FOB” goes back to the time of sailing ships when freight was “passed over the rail by hand.” Once the goods were over the ship’s rail, they shifted from the owner’s to the buyer’s responsibility. If the goods fell overboard at that point or were damaged, they became the buyer’s loss, not the seller’s. It is important to note that under FOB shipping point terms, when the freight has been prepaid by the seller, the buyer does not include the amount of freight when calculating cash settlement discounts on the invoice. Our Q & A section includes a worked example of FOB shipping point freight prepaid. It is important to understand the nature of the term accounting FOB, as it will affect how the freight charges are posted to the accounting records. If it’s a company with lots of expertise and contacts in international shipping that can negotiate cheaper insurance rates, the firm will likely not favor the CIF option.

• Some companies will offer different international shipping for different types of products.
• With FOB destination, ownership of goods is transferred to the buyer at the buyer’s loading dock.
• Assume the computers were never delivered to Company XYZ’s destination, for whatever reason.
• At that point, the buyer foots the bill for transport, insurance, and anything else that might arise.
• If “Freight Prepaid” is where the seller takes on the shipping costs, “Freight Collect” flips that script.
• As the goods shipped from the seller, the buyer would have to add $50,000 to their inventory and $50,000 to their accounts payable.
• FOB terms are the linchpin in determining who bears the shipping costs and responsibilities in a transaction.

They may also choose higher insurance limits, as they want to ensure that the goods are delivered in excellent condition. With the advent of e-commerce, most commercial electronic transactions occur under the terms of “FOB shipping point” or “FCA shipping point”. International shipments typically use “FOB” as defined by the Incoterms standards, where it always stands for “Free On Board”. Domestic shipments within the United States or Canada often use a different meaning, specific to North America, which is inconsistent with the Incoterms standards.

How to document FOB shipping terms

CIF is commonly used for large deliveries, including oversized goods, that are shipped by sea. The seller also obtains the necessary documentation, licenses, and inspections that may be required. Understanding these variations can profoundly affect your supply chain and your ability to manage shipping costs effectively. These terms determine ownership and payment responsibilities, fob shipping point influencing everything from shipping documents to customs clearance. Also known as “FOB Shipping Point,” this term means the buyer assumes both ownership and all freight costs right from the seller’s location or originating port. By understanding the implications of different FOB terms, you can navigate the complexities of shipping costs and responsibilities.

• Instead, the buyer assumes all responsibility for the shipment when it leaves the seller’s dock.
• Because of this, misunderstanding FOB shipping point terms can be costly for buyers.
• You see the term “FOB shipping point” in the contract but, unsure what it means, you sign away.
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• With accounting and FOB shipping arrangements, other options may need to be considered.

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