Definition: FOB destination, also called free on board shipping, is a set of delivery terms that transfers the title of goods from the seller to the buyer when the goods are physically delivered to the buyer. Destination also implies that the seller pays the freight bill. In other words, it sets the shipment terms by naming the party who pays the delivery costs and identifying when the title is transferred to the buyer.
What Does FOB Destination Mean?
FOB destination transfers the title of shipped goods when it arrives at the buyer’s specified delivery location—usually the buyer’s loading dock, post office box, or office building. As soon as the goods arrive at the buyer’s delivery location, the legal title of the goods transfers from the seller to the buyer. This means that the seller legally owns the goods during the shipping process. If something happens while the goods are on the delivery truck, the seller is responsible for them because it still legally owns them.
Let’s look at an example.
Don’s Pharmacy orders several computers from Dell to replace its current point of sale system. Don orders them with FOB destination shipping terms. Dell receives the order, packages up the computers, and sends them to the delivery department where they are loaded onto trucks. Half way to Don’s office, the truck crashes and the computers are destroyed. Who is responsible?
Since the computers were shipped FOB destination, Dell (the seller) is responsible for the goods during the shipping process. The goods were never delivered to Don, so Dell is fully responsible for the computer damages and would have to file a claim with its insurance company.
The concept of FOB destination shipping is important to accounting because according to the accrual method and the matching principle, we record revenues when they are earned. Since the title didn’t transfer to the buyer, Dell didn’t actually make a sale yet. Thus, it shouldn’t record the revenue until the shipment is delivered.
FOB shipping point, on the other hand, would have recorded the revenue.