FOB (free on board)
FOB is a shipping term specifying the point where ownership and risk of loss transfer from seller to buyer during transportation. FOB Origin (or FOB Shipping Point) means the buyer assumes responsibility when goods leave the seller's facility, while FOB Destination means risk transfers when goods arrive at the buyer's location.
Examples
FOB Origin: A purchase order specifies FOB Origin. The supplier loads goods on a truck at their facility, and from that moment the buyer owns the goods and bears risk of loss during transit. If the shipment is damaged in transit, the buyer files the freight claim.
FOB Destination: Under FOB Destination terms, the seller retains ownership and risk until goods reach the buyer's receiving dock. The seller is responsible for shipping arrangements and bears risk during transit.
FOB named port (international): In international trade, "FOB Shanghai" means the seller delivers goods on board a vessel in Shanghai, with risk transferring when goods cross the ship's rail. The buyer arranges and pays for ocean freight from that point.
Definition
FOB determines not just who pays for shipping but, more importantly, who bears the risk of loss or damage during transit. This risk allocation affects insurance requirements and who files claims when problems occur.
In domestic US trade, FOB typically appears as FOB Origin or FOB Destination. These terms are relatively straightforward: either the buyer or seller bears transit risk. The party not bearing risk typically doesn't need transit insurance.
In international trade, FOB is one of several Incoterms defining risk transfer points. FOB specifically applies to ocean freight, with risk transferring when goods are loaded on the vessel. For other transportation modes, terms like FCA (Free Carrier) may be more appropriate.
FOB affects inventory accounting. Under FOB Origin, goods in transit are the buyer's inventory. Under FOB Destination, goods remain the seller's inventory until delivery. This affects when purchases are recorded and inventory is recognized.
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