What Does "FOB" Mean in Accounting?
A common accounting term, "FOB," deals with freight and shipping. Accurately recording freight is important because firms may either capitalize the freight as an asset or expense it as a period cost.
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FOB Defined
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"FOB" stands for "freight on board." There are two designations that typically follow the abbreviation FOB. One designation is shipping point and the other is destination. Buyers responsible for FOB represent transportation in; sellers responsible for FOB is transportation out.
FOB Shipping Point
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An FOB shipping point means that a transaction occurred at the seller's location. The buyer pays all freight costs relating to the goods purchased. Freight typically represents semi-trucks that haul large deliveries of goods from the seller to the buyer.
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FOB Destination
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An FOB destination indicates a transaction where a seller is responsible to pay freight costs. Sellers will often pay the freight company upfront for all shipping costs. Sellers will not usually charge buyers for the freight during this transaction, although this is not always the case.
Considerations
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When a transaction occurs under an FOB destination, the transaction is not complete until the goods reach the buyers location. The seller is responsible for all actions or activities that occur during shipping. For example, damages to goods shipped via freight are an additional cost to the seller.
General Ledger Recording
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Goods shipped as FOB shipping point -- known as transportation in -- are part of an asset's cost. For example, large equipment purchased and shipped FOB shipping point will have the costs included as part of the asset. FOB destination -- or transportation out -----is a period cost and expensed immediately when the company receives the goods.
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