FOB Shipping Point vs. FOB Destination: What Is the Difference?
FOB, free on board, is a shipping term that determines exactly when ownership and risk of loss transfer from seller to buyer during transit. The two variants, FOB shipping point and FOB destination, place that transfer at opposite ends of the shipment, which affects who bears the cost if goods are lost or damaged in transit and, just as importantly, which period the transaction belongs to in each party's accounting records.
FOB Shipping Point
Under FOB shipping point, ownership and risk transfer to the buyer the moment goods leave the seller's location, typically when they are loaded onto the carrier. From that point on, the goods belong to the buyer, even though they are physically still in transit and have not arrived yet.
- Who bears transit risk:
the buyer. If the shipment is lost or damaged in transit, it is the buyer's loss, not the seller's. - Who typically pays freight:
the buyer, since they already own the goods for the duration of the shipment. - When the buyer records the purchase:
on the ship date, not the arrival date.
FOB Destination
Under FOB destination, ownership and risk remain with the seller until the goods physically arrive at the buyer's location. The seller bears the risk of loss during transit, since the goods are still legally theirs until delivery.
- Who bears transit risk:
the seller. A shipment lost or damaged in transit is the seller's problem to resolve. - Who typically pays freight:
the seller, since they retain responsibility for the goods until delivery. - When the buyer records the purchase:
on the arrival date, not the ship date.
Why This Distinction Matters for Accounting
The practical consequence shows up most clearly at period end, when a shipment is in transit exactly as the books close. Under FOB shipping point, that inventory already belongs to the buyer and should appear in their inventory count and their payable, even though it has not physically arrived. Under FOB destination, the same shipment still belongs to the seller and should not appear on the buyer's books at all until it arrives.
EXAMPLE
A $40,000 shipment leaves the supplier on June 28 and arrives at the buyer's warehouse on July 3, with the books closing June 30.
FOB shipping point: the buyer owns the goods from June 28. The $40,000 belongs in June inventory and June accounts payable, even though nothing has physically arrived yet.
FOB destination: ownership does not transfer until July 3. Nothing is recorded on either side's books until then, and the $40,000 belongs entirely to July.
Getting this wrong in either direction creates a cutoff error: inventory and payables either counted a period too early or a period too late, understating or overstating what a business actually owned and owed at close.
Reading Shipping Terms Correctly
- Check the purchase order or contract.
Shipping terms are agreed upfront, not decided at time of shipment. - Identify the transfer point.
Shipping point means transfer at origin; destination means transfer at the buyer's door. - Apply it to any goods in transit at period end.
This is the point where the distinction actually changes a reported number. - Confirm freight responsibility matches.
Freight terms and ownership terms are related but not always identical, and can be negotiated separately from the FOB point itself.
FOB Terms and Landed Cost
FOB terms directly affect what belongs in landed cost calculations. Under FOB shipping point, since the buyer owns the goods for the full transit, freight is typically the buyer's cost and belongs in their landed cost. Under FOB destination, freight is typically the seller's cost, already built into the purchase price, and does not need to be added separately by the buyer.
Frequently Asked Questions About FOB Shipping Point vs. FOB Destination
1. What is the difference between FOB shipping point and FOB destination?
FOB shipping point transfers ownership and risk to the buyer when goods leave the seller's location. FOB destination keeps ownership and risk with the seller until the goods physically arrive at the buyer's location. The terms determine who bears transit risk and typically who pays freight.
2. What does FOB stand for?
Free On Board, a shipping term originally from maritime trade that now broadly describes the point in transit where ownership and risk of loss transfer from seller to buyer.
3. Who pays freight under FOB shipping point versus FOB destination?
Under FOB shipping point, the buyer typically pays freight, since they own the goods for the duration of transit. Under FOB destination, the seller typically pays freight, since they retain ownership and responsibility until delivery.
4. Why do FOB terms matter for period-end accounting?
They determine which party should record a shipment still in transit at period end. Under FOB shipping point, the buyer already owns it and should include it in inventory and payables even though it has not arrived. Under FOB destination, it stays off the buyer's books until it arrives.
5. What happens if goods are lost in transit?
Under FOB shipping point, the loss belongs to the buyer, since ownership already transferred when the goods shipped. Under FOB destination, the loss belongs to the seller, since ownership had not yet transferred at the time of the loss.
6. How do FOB terms affect landed cost?
Under FOB shipping point, freight is generally the buyer's cost and should be added into landed cost. Under FOB destination, freight is generally the seller's cost, typically already reflected in the purchase price, so the buyer does not add it separately.
