What is Free on Board (FOB)?
Free on Board (FOB) Definition
Free on Board, commonly referred to as F.O.B., is a shipping designation used to specify obligations and responsibilities for goods when they are shifted from seller to buyer as sea freight.
FOB is part of the incoterms list published by the International Chamber of Commerce.
These terms are used to standardize shipping and freight contracts and avoid lengthy negotiations by expressing contractual obligations in simple phrases.
Generally, FOB is generally specified in a sales agreement and is accounted for under inventory costs.
In classic FOB contracts, sellers are relieved of responsibility and costs for their goods, once the goods are loaded onto a container ship.
Using FOB in Shipping Contracts
There are four different ways of using FOB in shipping contracts:
- FOB [Place of Origin], Freight Collect indicates that the buyer has assumed responsibility for the freight at its origin and will pay associated freight charges at the destination.
- FOB [Place of Origin], Freight Prepaid indicates that the buyer has assumed responsibility for the freight at its origin and the seller has paid for the freight charges.
- FOB [Place of Destination], Freight Collect indicates that the buyer will take responsibility for the freight only after it reaches the destination and will pay associated freight charges at the destination.
- FOB [Place of Destination], Freight Prepaid indicates that the seller is responsible for the freight during the shipping process and the associated freight charges have already been prepaid by them.
FOB is important because it has shipping, liability, and accounting implications.
- It assigns shipping costs responsibility for freight items. For example, goods marked FOB [Place of Origin] become the responsibility of the buyer during the shipping process and they are responsible for paying charges associated with moving the items from origin to destination.
- It assigns liability costs and accountability for freight items. In the previous example, the buyer may end up paying double charges if they return a damaged shipment back to the seller for a freight marked as FOB [Place of Origin]. In such cases, the buyer will also have to buy insurance to recover shipment costs.
- It has accounting implications because the seller can book costs for goods sold earlier, if they are marked FOB [Place of Origin].