On an invoice, FOB means ‘Free on board’ or ‘Freight on board’. The FOB term refers to the moment where a business that is shipping products is no longer responsible for the items.
FOB agreements are often a part of international shipments. A destination always follows FOB. The ‘FOB destination’ or ‘FOB shipping point’ indicates when the seller is no longer responsible for items.
Why is FOB on an invoice important?
FOB plays an important part in small business accounting. FOB defines who pays for the shipping costs and who is responsible for a lost, stolen or damaged shipment.
FOB also shows when the sale is recorded for accounting purposes.
FOB specifies when the seller is no longer responsible for goods. Delivery is considered to be complete when the goods are loaded onto the shipping vessel. From an accounting perspective, the seller can then record the sale while the buyer would record the inventory. This is because the buyer now assumes all responsibility for the shipment once goods are ‘free on board’. The buyer will take on transport and insurance costs, and any potential risks or damages that may occur while shipment is in transit.
An invoice that indicates FOB accounts for all costs up until and including loading the goods onto the shipping vessel into the price. However, including FOB on an invoice does not include additional costs incurred during shipping, such as insurance or transportation fees.
Is there a difference between FOB shipping point & FOB destination
The term FOB Shipping Point indicates that the responsibility and ownership of the goods is transferred from the seller to the buyer at the seller’s location (or point of origin). The buyer is responsible for any damage, loss or theft and costs. FOB shipping point benefits the seller more.
In contrast, FOB destination (with the destination city) is better for the buyer. This is because the seller is responsible for the goods up until to the point of arrival at the buyer’s location. This includes ensuring the goods arrive at the FOB destination in a satisfactory condition.
What is the difference between CIF & FOB
CIF refers to Cost, Insurance and Freight on shipping invoices. The difference between the CIF and FOB terms is who is responsible for the goods in transit.
Under a CIF contract, the seller is responsible for the insurance and any other shipping costs. The seller’s responsibilities include:
- Transporting goods to the closest port
- Loading goods onto shipping vessel
- Costs of insuring goods
- Costs of shipping
However, in FOB agreements, the seller transfers responsibility to the buyer as soon as the goods leave the seller’s location (FOB shipping point) or buyer’s location (FOB destination).
Learn about the different types of invoices and how to make an invoice with our small business tutorial.
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