They also assume all risks and are responsible for filing claims in the case of loss or damage. Each party should have a firm understanding of free on board (FOB) to ensure a smooth transfer of goods from the vendor to the client. Regardless of whether that transfer occurs on the domestic or international level, FOB terms can impact inventory, shipping, and insurance costs. In this case, Super Widgets as the seller is responsible for the freight charges needed to transport the goods from their location to your receiving dock at Widget World. The risk transfer is relatively similar for both Incoterms, with CIF stating that the risk transfer occurs when the goods are loaded on the shipping vessel bound to the destination port.
Any missing information will be confirmed, and the logistics company will reserve a spot on the designated ship for your cargo. On the other hand, the accounting rules are different when operating under FOB destination. Here, neither the buyer nor the seller can claim the difference in inventory until the goods have reached their final destination.
What is the Difference Between FOB and CIF?
This is because it splits the responsibilities between buyers and sellers relatively evenly. The other portion of the FOB designation sets out how the freight costs are paid in the transaction. Specifically, each type of shipping can have the freight costs paid upfront (prepaid), or they may need to be collected after the products arrive to the buyer. The FOB shipping point Professional Bookkeeping Services BELAY or place of origin is where the products are shipped and start their movement toward their final destination. In the early days, whatever port they were leaving from — today, that can be wherever the transfer process starts. However, you should not assume that you are responsible for the shipping costs and liability just because you see FOB on an invoice or agreement.
- The most important reason you should understand FOB terms is that they set out who is responsible for certain costs and who must take action if the products are harmed or lost during the shipping process.
- The legal issues raised in FOB designations are nothing new to us here at Freightquote.
- If you’re importing products from another country, how do you know who owns the goods while they’re in transit?
- That also means that if a pallet of jewelry is lost or damaged in shipment, the buyer must file any claims for reimbursement – not the seller – since the shipment became the buyer’s responsibility immediately.
- “Freight Collect” refers to the legal fact that the buyer is responsible for all freight charges.
- With that in mind, it is very important to have proper documentation, especially in regards to FOB terms.
Instead of relying on the supplier for part or all of the freighting process. The buyer only needs to rely on a single company throughout the transportation process, thus, minimizing the https://kelleysbookkeeping.com/brigade-outsourced-accounting-for-small-businesses/ back and forth and potential for miscommunication between two shipping companies. FOB is the most common agreement between an international buyer and seller when shipping cargo via sea.
What is FOB Destination? Meaning, Terms, Who Pays?
To understand each designation, we must first understand the difference between place of origin and place of destination and freight collect vs. freight prepaid. “Prepaid” means the seller has paid the freight; “collect” indicates the buyer is responsible for payment. In international shipping, for example, “FOB [name of originating port]” means that the seller (consignor) is responsible for transportation of the goods to the port of shipment and the cost of loading. The buyer (consignee) pays the costs of ocean freight, insurance, unloading, and transportation from the arrival port to the final destination.
That allows the buyer to ensure they arrive in good condition and can be inspected upon receipt. The seller retains liability until the buyer accepts the goods, ownership, and liability at the receiving dock, office or agreed-upon place of transfer, after inspecting for damage. With FOB shipping point, the buyer pays for shipping costs, in addition to any damage during shipping. The buyer is the one who would file a claim for damages if needed, as the buyer holds the title and ownership of the goods.
FOB Shipping and Pricing
It is the point in the supply chain where the seller relinquishes ownership, and the buyer accepts ownership of products purchased in a specific transaction. Every vendor/client relationship should have the FOB terms specified in their PO (that’s purchase order) purchase terms. Unlike FOB shipping point, FOB destination, indicates that the ownership of goods is not transferred to the buyer until they arrive at their destination. In other words, carriage costs are the buyer’s responsibility with FOB and the seller’s responsibility with CIF. You may come upon cost, insurance, and freight (CIF) and FOB in dealing with international sending contracts.