“Free on board” is a shipping term that refers to the transportation arrangements between a buyer and seller. For accountants, FOB can take two forms: FOB Shipping Point or FOB Destination. Which FOB term applies defines when ownership of goods changes from seller to buyer, who pays shipping costs and whether these costs are considered part of the cost of goods.
FOB Shipping Point Versus Destination
When goods are shipped FOB Shipping Point, it means the buyer takes ownership when the products leave the seller’s shipping facility. The buyer is then responsible for transportation costs. Since transportation expenses are required to acquire the goods, they are added to the cost of goods in the buyer’s accounting records. FOB Destination means the seller retains ownership of the goods until they arrive at the buyer’s receiving facility. The seller pays transportation costs. However, when the seller pays transportation costs under FOB Destination terms, these costs should be counted as cost of sales, not cost of goods.