FOB Shipping Point
FOB shipping point refers to free-on-board shipping point. It is a shipment term under which delivery is considered to be complete the moment the seller ships the goods. The buyer bears any subsequent risk inherent in the goods and he is normally liable to pay the shipment cost too.
If a sale is FOB shipping point, it is recorded when the goods are shipped and the parties do not need to wait for them to reach their destination. FOB destination on the other hand, is a shipment term under which the seller transfers the risk at the moment the goods reach the destination.
Bloemen voor Alle is a Dutch business engaged in export of flowers. It received an order worth $50,000 from a Dubai real estate developer on 1 October 2012 and it was ship the flowers by 15 October 2012. Bloemen voor Alle shipped the flowers on 11 October 2012. The shipment cost is $4,000. When should Bloemen voor Alle record the sale? When should the Dubai real estate developer record the sale and at what cost?
Since the shipment is FOB shipping point, the delivery is made at the moment the flowers are shipped. Bloemen voor Alle should record the sale at $50,000 on 11 October 2012.
The Dubai real estate developer should record the purchase on 11 October 2012 too. It should record the inventory at $54,000 ($50,000 purchase price plus $4,000 shipment cost). It is because under FOB shipping point, shipment cost is normally incurred by the buyer.
Written by Obaidullah Jan, ACA, CFA