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Freight on Board (FOB)

See Also:
Ex Works (EXW)
How to manage inventory
Just in Time Inventory System
Inventory Cost
Accounting Principles

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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freight on board

freight on board

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Ex Works (EXW)

See Also:
Freight on Board (FOB)
Transfer Risk
How to manage inventory
Accounting Principles
Accounting Concepts

Ex Works (EXW) Definition

Ex works is an agreement between a buyer and a seller that the seller assumes no responsibility for the cost or liability for a product after it is produced and has left the seller’s warehouse.

Ex Works (EXW) Meaning

Ex works is the same as Freight on Board (FOB) Shipping. The two terms can be used interchangeably because they assume the same terms and agreement between the buyer and seller. The advantage of ex-works from a seller’s standpoint is that the seller is allowed to recognize revenue once the product has been picked up or a contract has been signed. If a contract has been signed then a seller could potentially recognize revenue as the product finishes going through the manufacturing process. On the other side ex works means that a buyer has a potential for loss for the transportation part of the purchase.

Ex Works (EXW) Example

Wawadoo Inc. is a company that specializes in the production of widgets. Wawadoo was recently able to sign ex works shipping terms with another company named, Wanna Widget Inc. Due to these terms, Wawadoo can save on the transportation cost associated with the charge focus solely on production. This becomes beneficial to both companies because Wanna Widget has a well established transportation network and is able to transport the products at a lower cost. Therefore, Wawadoo can drop the price of its widgets to Wanna Widget. Wanna Widget can lower its expense and sell widgets for lower because they can buy the product at a lower price and transport it for cheaper than Wawadoo could.

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