That allows the buyer to ensure they arrive in good condition and can be inspected upon receipt. The seller retains liability until the buyer accepts the goods, ownership, and liability at the receiving dock, office or agreed-upon place of transfer, after inspecting for damage.
The shipment is sent to Newark, New Jersey, and the watches are damaged in transit. The liability for any damage or loss then belongs to the buyer. Shipping terms are important because of the massive worldwide volume shipped, and the need to have a common understanding of these terms for contracts. The terms affect shipping costs, liability, and even financial statements for accounting.
With so many languages spoken, it makes sense to have agreed-upon terms to lessen confusion. Inventory costs are expensive and include not only the cost of goods, but the fees to prepare inventory for sale. Delays in recognizing costs as expenses affect net income. The amount of inventory and cost of goods on the books changes as well, depending on where the goods are and the FOB status.
And of course, accepting liability for goods adds to the profits and losses, if there is damage during transit. The earliest ICC guidelines were published in , when the rail was still used — goods were passed over the rail by hand, not with a crane. And liability mattered then too. This type of shipping term may affect the buyer's inventory cost due to the costs including all expenses involved in preparing the inventory for sale. Since the buyer would then have to add costs to their inventory, they cannot immediately outlay the costs.
This delay in rendering the costs as an expense can ultimately affect the buyer's net income, rather than the seller's. The following differences can be noted when a seller enters into a contract with a buyer. For instance, when the sale of goods and the related receivable occurs, there is a difference in the way a buyer and seller account for the inventory. Similarly, the assumed costs and liabilities can also present differences between the party responsible for shipping expenses as well as the responsibility of the products during transport.
These several key differences are outlined below. With a FOB shipping point sale, the buyer assumes all responsibility and legal liability for the goods purchased. This means that the buyer is responsible for recording the sale at the point of transport within their accounts payable, meaning that an increase in their inventory has taken place.
Conversely, the seller records the point of sale at the time of shipment and records the sale within their accounts receivable, as an added payment, whether the payment has been made or is waiting to be made.
Another important difference between FOB shipping point and FOB destination is that of the party responsible for the shipping costs of the products. In a FOB shipping point contract, the seller transfers any title of ownership to the buyer upon the product leaving the seller's location. The buyer then has full ownership.
In a FOB destination sale contract, the buyer may not receive the title of ownership until the product reaches the buyer's location. Business Essentials. Corporate Finance. Corporate Insurance. International Markets.
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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Business Essentials Guide to Mergers and Acquisitions. Business Business Essentials. Free on Board Shipping Point vs. Free on Board Destination: An Overview 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.
Key Takeaways Free on board FOB is a trade term used to indicate whether the buyer or the seller is liable for goods that are lost, damaged, or destroyed during shipment. Free on board shipping point indicates that the buyer takes responsibility for loss or damage the moment the goods get to the shipper. Free on board destination indicates that the seller retains liability for loss or damage until the goods are delivered to the buyer.
Brent Wm. Primus, J. Previous columns, including those of William J. Your questions are welcome at brent primuslawoffice. Home All Articles Articles F. Destination: What Is the Difference?
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