What Does FOB Mean on an Invoice?
Shipping products from the seller to the buyer includes complex terminology, especially if we consider international shipping. The transport must be carefully planned every step of the way, and it must be accompanied by the right documents to reach the buyer without any issues.
One of the most frequent questions related to the papers included in the transport is ‘what does FOB mean?’ FOB on an invoice means Free On Board. Also called Freight On Board, the term concerns the responsibility regarding the products during transport.
More precisely, it refers to the point where the seller isn’t liable for what happens to the products anymore. Below, we will take a closer look at how the obligations are limited and what the FOB accounting implications are.
What Does FOB Mean in an Invoice?
When you see the term FOB on an invoice, it’s connected to assigning the responsibility for the goods during transport. In the shipping business, it’s crucial to make it crystal clear which party is liable every step of the way.
The FOB marks the point when the business that sends the merchandise to the buyer ceases to be responsible for it. Most of the time, responsibility refers to the shipping costs. In its technical meaning, FOB means the shipping is free for the person who receives the goods.
It’s also meant to be used only when the merchandise is shipped overseas, on a vessel. But in common practice, it’s used for land transportation as well.
What Is the Difference Between FOB Shipping Point and FOB Destination?
The term FOB on an invoice can be used in two instances, and it refers to when the ownership of the shipping passes from the seller to the buyer.
From the moment the goods get on board the ship until the consignee receives them at the destination, it is crucial to know precisely who is responsible for the transportation costs and when the transfer of ownership becomes effective.
When you see on the invoice FOB shipping point, it means that it’s the buyer who pays the shipping costs and is transferred the ownership of the goods at the moment they pass from the seller to the carrier.
So not only does the buyer pay for the transport, but they also have to deal with anything that may happen to the goods until they reach the destination; that’s no longer the seller’s concern.
On the other hand, FOB destination means that the seller covers the shipping costs, and it’s only when the goods reach the buyer that the ownership is transferred.
So, the difference between the two lies in the point where the ownership of the goods change’s hands. The goods only become part of the buyer’s inventory once they are successfully delivered.
Why Is FOB Important to Small Business Accounting?
We mentioned inventory above, and that’s part of the answer to the question ‘what does FOB stand for in accounting?’. FOB is a crucial part of the shipping agreement, as it points out precisely who covers the costs and is responsible for the goods during transport (in case it’s damaged or stolen, for example).
FOB in accounting is essential because it decides at what point the transaction is recorded, and the goods become part of the buyer’s inventory. With a FOB shipping point, you need to register the sale in the accounting system as soon as the vessel carrying the goods moves away from the dock.
If you’re the buyer, you can note it in your accounting records as ‘inventory on the route.’ You benefit more from a FOB destination if you are the buyer because that way, the goods are only registered in your accounting system once they have reached the destination point undamaged.
When it comes to shipping, all details are important, and every document has to be written carefully and with high accuracy. Misunderstandings and mistakes can prove to be quite expensive, so it’s best to keep things clear.
Now that the question ‘what does FOB mean?’ has been answered, it’s obvious how important the invoice is. It’s a central part of the transaction, especially when it involves international shipping on board a vessel. FOB on invoice needs to be mentioned clearly, with all the necessary details.
Otherwise, you may need to deal with customs issues, among other problems that may occur. The best way to prevent that is by creating your invoice using a high-quality template; that way all the necessary details will be included.