Freight on Board (FOB) definition
Freight on Board, known internationally as Free on Board, are the terms of a transaction within a contract. The terms are there to determine liability and when revenue recognition can take place between two parties. This becomes of interest to companies during the transportation of goods from one company to another. There are commonly two types of fob revenue recognition and liability, fob destination and fob shipping.
Freight on Board Destination
Freight or free on board destination means the terms of the transaction as it pertains to liabilities of the goods being delivered for a company will not pass on to the customer or the purchaser until it arrives on location of that customer. Therefore a company cannot and should not recognize revenue until the goods have arrived on location of the customer.
Freight on Board Shipping
Freight or free on board shipping point means that a company is allowing the purchaser or customer to assume the responsibility as soon as the goods have left the seller’s warehouse or business location. The seller is then allowed to recognize revenue as soon as the goods leave because the payment for these goods is certain as they leave the location.
Freight on Board Example
Acme inc. supplies TNT explosives and anvils to its various customers around the globe. Wile E. Coyote has hatched a plan to once and for all destroy the Road Runner. He orders some TNT explosives from Acme in order to set his plan in motion. Acme uses fob shipping point when it has to deliver goods. Therefore Acme recognizes the revenue immediately as the goods leave the warehouse. Even if the truck were to crash on its way the company can still expect payment because Wile. E Coyote is liable. If the terms had been fob destination and the truck had crashed on the way then Wile E. Coyote would not be expected to pay for that shipment of goods and Acme inc. would be required to accept the loss.
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