FOB Accounting

FOB Accounting Definition

FOB accounting deals with the treatment of freight charges and how they are recorded in the accounting system.

FOB means Free on Board and is an abbreviated term used in shipping. It is important to understand the nature of the term accounting FOB, as it will affect how the freight charges are posted to the accounting records.

Having decided that the terms of the contract are FOB, it is now necessary to choose the point at which responsibility passes from the seller to the buyer. The FOB point can either be the buyers destination, or the place from which the goods are shipped – the shipping point.

FOB Destination Accounting

FOB destination, is used to mean the seller of the goods pays all expenses in putting the goods ‘on board’ the transport, and delivering them to the buyers destination.

FOB Accounting – FOB Destination
Destination
Seller responsible Buyer responsible

Once the goods are at the buyers destination, the ownership of the goods and the risk passes to the buyer. The buyer now has an obligation to pay for the goods and is responsible for all future expenses.

As an example of FOB destination accounting, suppose the value of the goods is 5,000 and the freight expense to the buyers destination of 600 is paid in cash by the seller.

Seller Accounts – FOB Accounting Journal
Account Debit Credit
Accounts receivable 5,000
Sales 5,000
Freight out 600
Cash 600
Total 5,600 5,600

As the goods were sold FOB destination the seller pays the expense of 600, and records this as Freight out under selling expenses.

Buyer Accounts – FOB Accounting Journal
Account Debit Credit
Purchases 5,000
Accounts payable 5,000
Total 5,000 5,000

At the buyers destination, the buyer has not yet incurred any freight but owes the seller for the goods.

FOB Shipping Point Accounting

FOB shipping point or FOB origin, is used to mean the seller has to get the goods to the shipping point, but the buyer is responsible for the expense of transporting the goods from the shipping point to their destination.

Once the goods are at the shipping point, the ownership of the goods and the risk passes to the buyer. The buyer now has an obligation to pay for the goods and is responsible for all future expenses.

FOB Accounting – FOB Shipping point
Shipping point
Seller responsible Buyer responsible

As an example of FOB shipping point accounting, suppose the value of the goods is again 5,000 and the freight expense from the shipping point of 600 is paid in cash by the buyer.

Seller Accounts – FOB Accounting Journal
Account Debit Credit
Accounts receivable 5,000
Sales 5,000
Total 5,000 5,000

As the goods were sold FOB shipping point, the seller does not have to pay the freight cost and is now owed the 5,000 for the goods.

Buyer Accounts – FOB Accounting Journal
Account Debit Credit
Purchases 5,000
Accounts payable 5,000
Freight in 600
Cash 600
Total 5,600 5,600

The buyer has to pay for the goods to be transported from the shipping point. The expense is recorded as Freight in and forms part of purchases.

FOB Shipping Point Freight Prepaid

A variation on FOB shipping point is were the seller for convenience prepays the shipping cost and recovers this from the buyer at a later date.

Seller Accounts – FOB Accounting Journal
Account Debit Credit
Accounts receivable 5,000
Accounts receivable – Freight 600
Sales 5,000
Cash 600
Total 5,600 5,600

As the goods were sold FOB shipping point, the seller does not have to pay the freight cost. However, in this case the seller has prepaid the shipping cost on behalf of the buyer and is now owed 5,600.

Buyer Accounts – FOB Accounting Journal
Account Debit Credit
Purchases 5,000
Accounts payable 5,000
Accounts payable – Freight 600
Freight in 600
Total 5,600 5,600

The buyer has to pay for the goods to be transported from the shipping point. The expense is recorded as Freight in and forms part of purchases. As the shipping costs have already been paid, the amount is owed to the seller.

It is important to note that under FOB shipping point terms, when the freight has been prepaid by the seller, the buyer does not include the amount of freight when calculating cash settlement discounts on the invoice. Our Q & A section includes a worked example of FOB shipping point freight prepaid.

FOB Accounting November 6th, 2016Team

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