What it means
FOB stands for free on board, and the word that follows it names the point where responsibility changes hands. Under FOB destination the transfer happens on delivery, which is the opposite of FOB shipping point, where it happens the moment goods leave the seller's dock.
The distinction matters most at every period end. Goods still in transit on the last day of the month belong to the seller under FOB destination, so the seller continues to count them as inventory and cannot yet record the sale.
Because the seller carries the risk, the seller normally pays the freight and insurance and builds that cost into the selling price. Buyers often prefer these terms because the delivered price is predictable and they are not left chasing carriers over damaged pallets.
Auditors pay close attention to cut-off testing around these terms, since recording a FOB destination sale too early is one of the simplest ways to overstate revenue. A shipment that left the warehouse on 30 September but arrived on 2 October belongs firmly in the next reporting period.
Variants exist, including FOB destination freight collect, where the buyer pays the carrier but the seller still owns the goods in transit. Who pays the freight and who owns the goods are separate questions, and confusing the two causes most of the disputes.
In practice
Real-world examples.
Example
A furniture manufacturer ships a $60,000 order of office desks on FOB destination terms. The lorry is involved in an accident and half the load is destroyed. Because ownership had not passed, the manufacturer absorbs the loss, claims on its own transit insurance and reships the order at its own cost.
Example
A pharmaceutical wholesaler buys temperature-sensitive stock and insists on FOB destination terms for every supplier. If a cold chain fails in transit, the supplier bears the loss, which gives suppliers a strong reason to invest in properly monitored refrigerated transport.
Example
A machinery importer closes its financial year on 31 December with three containers at sea, all on FOB destination terms. The importer records no inventory and no payable for those containers, while the overseas seller still shows the goods as its own stock until they are delivered in January.
Think of it
“FOB destination means the seller owns and is responsible for goods until they arrive at the buyer's place.
Formula
Calculation
Under FOB destination: revenue is recognised on the delivery date, and freight paid by the seller is recorded as a selling expense rather than added to the buyer's inventory cost.
A ceramics supplier despatches goods on 28 March with a selling price of $150,000 and an inventory cost of $95,000, and the buyer receives them on 3 April. Outbound freight and insurance cost the seller $4,500. At 31 March the seller reports no revenue from this order and keeps $95,000 sitting in inventory, because ownership has not transferred. In April the seller records $150,000 of revenue, $95,000 of cost of goods sold and $4,500 of freight out, giving a contribution of $150,000 - $95,000 - $4,500 = $50,500. The buyer records nothing at all in March, then adds $150,000 of inventory in April with no freight to capitalise.Case study
Seen in the real world.
Tellwright Ceramics is an illustrative, fictional tableware maker that sells to hotel groups on FOB destination terms. In its first year of rapid growth, the sales team recorded revenue whenever a pallet left the loading bay, because that was when the despatch note was raised.
At year end the auditors sampled deliveries and found $310,000 of revenue booked in December for shipments that were not signed for until January. Two of those loads had also been partially damaged in transit, meaning Tellwright still owned goods it had already invoiced and reported as sold.
The company changed its process so that the accounting system only recognised revenue once a proof-of-delivery signature was scanned in. Reported December revenue in this fictional example fell by $310,000, but the accounts became a fair picture of what had genuinely been delivered.
Watch out
Common mistakes.
- Recording revenue on the despatch date under FOB destination terms, when the sale is not complete until the goods arrive.
- Assuming that whoever pays the freight also owns the goods in transit, when ownership and freight responsibility are set separately.
- Leaving goods in transit out of the inventory count entirely, so they appear on neither the seller's nor the buyer's balance sheet.
Questions
People also ask.
What is the practical difference between FOB destination and FOB shipping point?
Under FOB destination the seller owns and insures the goods until delivery, while under FOB shipping point ownership and risk pass to the buyer as soon as the carrier collects.
Who should insure goods shipped FOB destination?
The seller should, because it still owns the goods and bears the loss if anything happens before they arrive.
Does FOB destination affect the buyer's stated inventory cost?
Yes, because the seller normally absorbs the freight, so the buyer capitalises only the invoiced price rather than adding delivery charges.
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