FOB vs CIF: How To Manage Risk And Responsibility
However, on the buyer’s side, they need to note down in the accounting system that the shipment comes along with an inventory. No matter whether the shipment fob shipping point has already arrived at the final destination or not. The second section, on the other hand, indicates the responsibility attached to the freight charges.
Once the products have arrived at the buyer’s location, however, the buyer assumes full legal responsibility for them. From a practical perspective, recognition of receipt is instead completed at the receiving dock of the buyer. Thus, the sale is recorded when the shipment leaves the seller’s facility, and the receipt is recorded when it arrives at the buyer’s facility.
Does FOB Mean Free Shipping?
When it comes to the cost of shipping, accountants follow the shipping terms to determine who’s responsible for this expense. The determination of who will be charged the freight costs is usually indicated in the terms of sale. If the Freight On Board is indicated as “FOB delivered,” the seller or shipper will be wholly responsible for all the costs involved in transporting the consignment. Where the FOB terms of sale are indicated as “FOB Origin,” the buyer is responsible for the costs involved in transporting the goods from the seller’s warehouse to the final destination. FOB Incoterms are also the most cost-effective option, as it allows the buyer to shop for the best possible shipping rate. While the transfer of risk occurs when the goods are safely loaded onto the shipping vessel, the buyer’s forwarder is responsible for the entire transportation process.
With Synder, you’ll be able to keep track of your shipping amounts and record them into your books flawlessly. The Smart Rules engine may help you to calculate VAT for your sales based on the shipping address country or region. When accounting for shipping costs, accountants assume follow the shipping terms to determine who is responsible for this expense. If the sale occurred at the shipping point , then the buyer is expected to pay the cost of transporting the goods to their location and will therefore record this cost as Freight-In. These provisions outline the point when responsibility for risk of loss shifts to the buyer, who covers the freight charges, delivery location and time, and the payment terms for the shipments.
Outlining the Pros and Cons of FOB Shipments
Under the FOB shipping point terms, the buyer pays the shipping cost from the factory and becomes responsible for the goods in case of any damages during the shipment. The FOB shipping point is an important term to understand in a contract, as it can significantly affect how much you pay for packing materials and insurance. The FOB destination is often used in international sales contracts but can also be used to be more specific about when or where the seller must deliver. The shipper accepts responsibility for all freight charges and risks. In some cases, FOB origin could be referred to with city names. The seller’s responsibility in such a case is only bringing the goods to the carrier or freight forwarder.
Under DDP, the seller is responsible for arranging the shipment to the destination port, paying charges at the destination port, and loading goods onto the truck there. FOB is viable for most bulk cargo and non-containerised goods shipped by sea or inland waterway transport. The seller will typically choose FOB if they have direct access to loading the goods onto the shipping vessel.
When not to use FOB
You purchase goods from a supplier in China and agree to FOB shipping terms. The next three steps of the process are carried out at the supplier’s expense. The term ‘free’ refers to the supplier’s obligation to deliver goods to a specific location, later to be transferred to a carrier. When shipping goods to a customer, FOB shipping point or FOB destination may be two primary options to choose from.
- Expert freight shipping tips and fast, easy tools to help you ship freight.
- Cost, Insurance, Freight puts the liability of payment for – you guessed it – cost, insurance, and freight on the supplier.
- The FOB shipping point is a term that is used in international trade.
- Therefore, it might not be suitable for new buyers due to the added responsibilities and increasing risk.
- For example, assume Company ABC in the United States buys electronic devices from its supplier in China, and the company signs a FOB shipping point agreement.
When transporting products to a customer, the two basic alternatives are FOB shipping point or FOB destination. FOB shipping point holds the seller responsible for the products until they begin their journey to the consumer. With FOB destination, the seller is held responsible for the items until they reach the customer.
China FOB – Standard Rates and Timeframes
Buyers can calculate the total costs of a FOB agreement by combining the FOB price from the seller and requesting a quotation from their freight forwarding company for the logistics. If you’re shipping items internationally, it’s essential to understand the terms and conditions of FOB. What’s even more important, you must record your shipping costs correctly.
- FOB Destination means the buyer assumes title of goods at the point of destination.
- In that case, just know what method to use as an international trader.
- The freight hauler then picks up and signs for the shipment, at which point the title of goods transfers to the buyer.
- International commercial laws have been in place for decades and were established to standardize the rules and regulations surrounding the shipment and transportation of goods.
- Brimich Logistics & Packaging Inc will be the preferred transportation, logistics and warehousing provider for its chosen market areas.