FOB stands for “Free On Board,” a term used in international commercial law specifying at what point the seller transfers ownership of goods to the buyer. The term also indicates who pays the transportation costs and at what point the responsibility for the goods transfers from the seller to the buyer.
FOB is typically followed by either “Shipping Point” or “Destination”:
- FOB Shipping Point (or FOB Origin): Ownership of the goods is transferred to the buyer at the seller’s shipping dock. After the goods have been loaded onto a delivery vehicle, the buyer becomes responsible for any damage or loss during transit and for all subsequent transportation costs.
- FOB Destination: Ownership of the goods remains with the seller during transport. The seller is responsible for the goods until they’re delivered to the buyer’s location. Only then does the ownership transfer to the buyer. The seller also covers all transportation costs up to this point.
The FOB terms are critical in determining when and where the title of the goods passes from the seller to the buyer, how the goods are reflected in the accounts of both parties, and who covers the freight charges.
Example of FOB
Let’s look at examples of FOB Shipping Point and FOB Destination.
Example 1: FOB Shipping Point
Imagine a wine producer in Italy selling a batch of wine to a retailer in the United States, under the terms of “FOB Shipping Point”.
Once the wine is loaded onto a ship in Italy, the ownership transfers from the wine producer to the U.S. retailer. From this moment, the U.S. retailer is responsible for all transportation costs and assumes the risk of any damage or loss during transit. On the retailer’s balance sheet, the wine is recorded as inventory immediately after it’s loaded onto the ship.
Example 2: FOB Destination
Now, let’s imagine the same scenario but under the terms of “FOB Destination”.
The wine producer in Italy sells a batch of wine to a U.S. retailer. This time, the wine producer maintains ownership of the wine during the shipping process and bears all transportation costs and risks of damage or loss.
Only when the wine arrives at the retailer’s location in the U.S., the ownership transfers to the retailer. At that point, the U.S. retailer would record the wine as inventory on its balance sheet.
In both examples, it’s the same wine, from the same producer, sold to the same retailer. The difference lies in when and where the ownership of the wine changes hands, who bears the transportation costs and risks, and when the wine is recorded as inventory. And these differences are all determined by the terms of “FOB Shipping Point” versus “FOB Destination”.