Whether a tenderfoot or a seasoned professional in the shipping industry, initiating a transportation business could be an ordeal. Running a smooth business involves specific skills and knowledge. You need to be aware of various terms that you might come across while you plan to begin one. You may have often heard of the term FOB while shipping anything. But, what does FOB mean? Most of the people including those in the business may not be completely clear about this term. Shipping invoice includes certain terms that are essential to understand for the growth of your business.
In this article, we will discuss the importance of FOB in an invoice. Check out this article to know more about this!
Let’s get into the basics first!
What does FOB mean?
FOB is a common acronym related to international commercial law that specifies various terms and conditions involved in delivering goods. This indicates who is responsible for paying the transportation cost.
FOB or Free On Board is often found on the shipping document which clearly indicates who is liable for the goods damaged or destroyed during the shipping. The designation determines who is responsible for the freight charges when it comes to an identified physical location.
FOB terms of sale mention certain conditions like who controls the movement of the goods, and at what time or the date the title passes on to the buyer. Depending upon the various add-on terms, the responsibility of the goods and their cost gets transferred from one party to the other.
To answer – what does FOB mean, the International Chamber of Commerce has clearly stated it is ‘Free On Board’. This was later altered by them in 2010 which states that the goods must be loaded by the seller on board the vessel nominated by the buyer.
What does FOB stand for?
Now you know what FOB means, but what does Fob stand for? FOB stands for ‘Free On Board’ or ‘Freight On Board’ is a transportation term that includes the price of the product from the seller’s end to a specific point and no further. FOB is a common agreement for international shipping that is often included in commercial invoices.
Failing to understand, manage and access the risk factors may lead a company to the bottom line. Hence, it’s important to have a clear conceptual idea about these transportation terms!
What is FOB Shipping Point?
FOB Shipping point means that the seller transfers the ownership of the goods as soon as the product leaves the warehouse. The seller records the sale once the goods leave the seller’s place and henceforth the buyer is responsible for the product. The seller won’t be responsible for any damage or loss of the product.
What is FOB Destination?
Unlike the FOB shipping point, FOB destination means the ownership of the products gets transferred from the seller to the buyer once the product reaches the buyer’s location in good condition. Hence, FOB destination is much more beneficial to the buyer than the seller. FOB destination safeguards the buyer from undue losses that may happen while shipping. Same way, FOB shipping points are beneficial to the seller. For example, if the goods are shipped to California, then it would be written as FOB California in the invoice.
Take a sneak-peek into the history of this shipping term in the following section!
History of FOB
The history of FOB dates back to the period when sea commerce was the primary means of transport. The liabilities of the freight were shared between the seller and buyer and were referred to as FOB. The main aspect of using FOB at that time was to determine who owns the freight in case of damage or theft during the transit. Therefore, it is important to set standard FOB terms which should be mentioned in the purchase order or contract to avoid unnecessary expenses.
To make sure that the FOB terms suit your company’s needs, take a look at the section below!
Add-on terms of FOB
There are various types of add-on terms that are related to FOB, which are also included in the freight invoice. It is essential to have a clear understanding of shipping terms so that both parties are well aware of who is responsible for unforeseen charges. Check out the below section to know more:
FOB Origin, Freight Prepaid:
The cost of shipping is paid by the shipper or seller, whereas the buyer or the receiver is responsible for the goods at the point of origin.
FOB Origin, Freight Collect:
The buyer or the receiver pays the shipping cost and is responsible for the goods.
FOB Origin, Freight Prepaid, & Charged Back:
In this case, the seller does not pay the shipping cost. Rather, he/she adds the amount in the invoice sent to the buyer. The buyer is liable for the responsibility of the goods at the point of origin.
FOB Destination, Freight Prepaid:
In this case, the shipping cost is paid by the seller until the cargo arrives at the buyer’s location.
FOB Destination, Freight Collect:
In this, the buyer does not take responsibility for the goods until the goods reach the buyer’s location. The shipping cost is paid by the buyer upon delivery of goods.
FOB Destination, Freight Prepaid, & Charged Back:
The seller is responsible for the freight until delivery and the cost is deducted from the invoice by the buyer.
FOB Destination, Freight Collect, and Allowed:
Unlike the last case, in this, the shipping cost is added to the invoice by the seller and the buyer pays it. The seller takes responsibility for the goods until delivered.
You may have come across this term if you have ever shipped anything. But if you wanna know how this helps in business accounting, go through the section below.
What is the significance of FOB in Small Business Accounting?
FOB is a vital accounting tool for small business enterprises. It sets the terms of the agreement that decides who will be responsible for shipping cost and damaged shipment. FOB also records the point of sale. If it is a FOB shipping point then, the buyer would record it as sold, once the product leaves the seller’s premises. The buyer will note it as inventory on the route and mark it as an asset even though it is not yet received by the buyer.
Hence, FOB is a significant accounting term for small businesses that helps decide their expenses. Depending upon this either the seller or the buyer will be responsible for the risk of transportation, shipment damage, and even in cases like theft.
What is the difference between CIF and FOB?
CIF is another transportation term that is important for small business owners to understand. The term CIF means Cost, Insurance, and Freight. The basic difference between CIF and FOB is that it decides who will be responsible for the products in transit. CIF is a contract that states that the seller is responsible for the insurance and the other shipping charges of the product and the buyer takes possession of the goods. Besides shipping costs and insurance charges, the seller is also responsible for the transportation of the goods to the nearest port and loading them onto the shipping vessel.
On the other hand, FOB works on either point of origin or destination depending upon its type. If it is mentioned as the FOB shipping point, then the product is the buyer’s responsibility when it leaves the warehouse. Whereas, in the case of FOB destination the product is the buyer’s responsibility only when it arrives at the buyer’s location.
Bottom line!
Transport business is a profitable one only when you are aware of its details. If you are wondering about the legal liabilities then it is a must to know about these FOB terms. If you are a logistic provider, facilitate the best goods transition and avoid the hassles of shipping documentation by learning about these transportation terms. This article will guide you through understanding more about FOB and its usage in a shipping invoice in detail.
