FOB (free on board)

FOB determines not just who pays for shipping but, more importantly, who bears the risk of loss or damage during transit. This risk allocation affects insurance requirements and who files claims when problems occur.

In domestic US trade, FOB typically appears as FOB Origin or FOB Destination. These terms are relatively straightforward: either the buyer or seller bears transit risk. The party not bearing risk typically doesn't need transit insurance.

In international trade, FOB is one of several Incoterms defining risk transfer points. FOB specifically applies to ocean freight, with risk transferring when goods are loaded on the vessel. For other transportation modes, terms like FCA (Free Carrier) may be more appropriate.

FOB affects inventory accounting. Under FOB Origin, goods in transit are the buyer's inventory. Under FOB Destination, goods remain the seller's inventory until delivery. This affects when purchases are recorded and inventory is recognized.

Frequently asked questions

What does FOB mean in shipping?

FOB (free on board) is a shipping term that specifies the point where ownership and risk of loss transfer from seller to buyer. FOB Origin means the buyer takes responsibility when goods leave the seller's facility, while FOB Destination means risk transfers when goods arrive at the buyer's location. The term determines who arranges shipping, who needs transit insurance, and who files claims when freight is damaged.

What is the difference between FOB Origin and FOB Destination?

Under FOB Origin the buyer owns the goods and bears risk of loss from the moment they are loaded at the supplier's facility, so the buyer files any freight claim for transit damage. Under FOB Destination the seller retains ownership and risk until goods reach the buyer's receiving dock and is responsible for shipping arrangements. The party bearing transit risk is the one that typically needs transit insurance.

How does FOB work in international trade?

In international trade FOB is one of the Incoterms and applies specifically to ocean freight, with risk transferring when goods are loaded on the vessel at the named port. FOB Shanghai, for example, means the seller delivers goods on board a vessel in Shanghai and the buyer arranges and pays for ocean freight from that point. For other transport modes, terms like FCA (Free Carrier) are usually more appropriate.

How does FOB affect inventory accounting?

FOB terms determine when goods in transit sit on the buyer's books. Under FOB Origin, in-transit goods are the buyer's inventory from the moment they ship, while under FOB Destination they remain the seller's inventory until delivery. This affects when purchases are recorded and when inventory is recognized.