What it means
FOB is a short phrase on a purchase order that quietly moves real money. Whoever holds title while a container is at sea pays the freight, carries the insurance risk and counts the goods in their inventory balance.
Accounting follows the title. Under FOB shipping point the seller recognises revenue when the goods are handed to the carrier, and the buyer records inventory and a payable at that same moment even though nothing has physically arrived.
Under FOB destination neither entry is made until delivery actually happens. That timing difference is why auditors ask about goods in transit at the year end.
A buyer who ignores an FOB shipping point consignment still on a ship will understate both inventory and payables, while a seller using FOB destination who books the sale on despatch has recognised revenue too early. The term also drives landed cost.
Freight, insurance, port handling and import duty all have to be added to the invoice price before you know what a unit really cost, and FOB tells you which of those charges belong to you. Two variants cause confusion.
The formal Incoterms rule FOB applies to sea and inland waterway shipments and places the transfer at the point the goods are loaded on board the vessel, while common North American usage treats FOB as a general phrase for any transport mode. Always read the named place after the letters, because FOB Shanghai and FOB Los Angeles describe very different bargains.
In practice
Real-world examples.
Example
An electronics distributor negotiates FOB destination with a new supplier after losing a container to storm damage the previous year. The unit price rises by about 4%, which the distributor accepts as the cost of moving transit risk onto the seller.
Example
A furniture retailer closes its books on 31 December with three FOB shipping point containers still at sea. The accountant adds $340,000 to inventory and the same amount to accounts payable, because title passed when the goods were loaded.
Example
A machinery exporter quotes FOB Rotterdam and the buyer arranges its own onward haulage. When a crane damages a crate during unloading at the destination warehouse, the loss falls on the buyer, and the exporter's invoice is paid in full.
Formula
Calculation
Landed cost = invoice price + freight + insurance + duty, with the FOB term deciding which of those the buyer bears.
An illustrative importer buys machinery parts with an invoice price of $200,000. Ocean freight is $12,000, marine insurance is $3,000, and import duty is 5% of the invoice price, which is $200,000 x 5% = $10,000.
Under FOB shipping point the buyer carries everything from the seller's dock onwards, so the parts enter inventory at $200,000 + $12,000 + $3,000 + $10,000 = $225,000, and they appear on the buyer's balance sheet from the day the vessel sails.
Under FOB destination the seller pays the $12,000 freight and the $3,000 insurance. The buyer records inventory of $200,000 + $10,000 = $210,000 on arrival, and the seller nets $200,000 - $15,000 = $185,000 from the sale, which is why an FOB destination quote is normally priced higher in the first place.Case study
Seen in the real world.
Calderfield Tools is an invented importer used here as an illustrative example. It bought hand tools from three overseas suppliers, all on FOB shipping point terms, and treated the goods as inventory only when they physically reached its warehouse.
At the first audit after a growth year, the auditors found roughly $1,100,000 of stock in transit at the balance sheet date that had never been recorded. Inventory and accounts payable were both understated, which had made the current ratio look tighter than it really was and had led the finance team to draw down more of its overdraft than necessary.
In this fictional case the fix was procedural rather than dramatic. Calderfield began recording a goods-in-transit inventory line from the bill of lading date, reconciled it monthly against carrier tracking, and used the corrected balance sheet to negotiate a better working capital facility the following year.
Watch out
Common mistakes.
- Reading FOB as simply meaning free delivery. It sets the point at which risk and title transfer, and under FOB shipping point the buyer pays every freight cost from that point onwards.
- Recording inventory only on physical arrival. Under FOB shipping point the goods belong to the buyer from despatch, so they must appear in inventory and payables while still in transit.
- Writing FOB without naming a place. FOB alone is ambiguous, and the named port or location is what actually defines where responsibility changes hands.
Questions
People also ask.
Who pays the insurance under FOB shipping point?
The buyer, because the risk of loss is theirs from the moment the goods leave the seller, so a buyer without marine cover is carrying that exposure directly.
How does FOB differ from CIF?
Under CIF the seller arranges and pays for cost, insurance and freight to the destination port, whereas under FOB the buyer takes on those arrangements once the goods are loaded.
Does FOB affect when revenue is recognised?
Yes. FOB shipping point normally allows the seller to recognise revenue at despatch, while FOB destination defers it until the goods are delivered.
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