Definition: FOB shipping point, also called free on board shipping, is a set of delivery terms that transfers the title of goods to the buyer when the shipment is placed on the truck for delivery. It also indicates that the buyer is required to pay for the shipping costs. In other words, it sets the shipment terms by naming who pays the freight costs and identifying when the seller transfers title to the buyer.
What Does FOB Shipping Point Mean?
FOB shipping point transfers the title of the shipment when the goods are placed at the shipping point. This is usually the seller’s loading dock, delivery truck, or postage office. As soon as the seller brings the goods to the point of shipment, the legal title of those goods passes to the buyer and the seller is no longer responsible for the goods during delivery. If the carrier damages the package, the buyer can’t come after the seller because the title has already transferred. The seller’s only responsibility is to bring the package to the loading dock or delivery truck. After that, it’s the buyer’s responsibility.
Let’s take a look at an example.
Toby’s Body Shop orders parts from GM to fix its customers cars on a weekly basis. Today, Toby orders a door from the local GM factory FOB shipping point. GM receives the order and brings it down to the loading dock for the UPS truck to pick it up and deliver it. On the way to the GM plant, the UPS driver gets into an accident and the package isn’t picked up. Later than night, vandals come and steal the package on the loading dock. Who is responsible?
Since the package was shipped using shipping point, the title of the goods transferred when GM placed the package on the loading dock. Toby is responsible for the stolen property.
This concept is particularly important in accounting because we record sales when they are made. This sale was made when GM dropped the goods off on the loading dock because the title transferred. Thus, GM should record the revenues.
FOB destination, on the other hand, would not have recorded the sale until the package was delivered.