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Accounting Jargon Defined: FOB Shipping Point vs. FOB Destination

Updated on July 9, 2012

Introduction

Accounting jargon are special terms used by accountants and bookkeepers. The primary goal is to shorten longer words or phrases into abbreviations or shortened terms. A secondary purpose, unfortunately, is the utter confusion of non-accountants because of the jargon. Accountants frequently use abbreviations so they have adequate space to precisely describe journal entries. One abbreviation is FOB, which works as a designation for freight and shipping. Accurately recording freight transaction is crucial due to the fact that businesses might either capitalize the freight as an asset or as an expense for period cost purposes.

FOB means freight on board. There are two secondary labels that generally follow the FOB abbreviation. One label is shipping point and also the some other is shipping destination. Customers liable for FOB must record this transaction as transportation-in; vendors accountable for FOB have a transportation-out transaction.

Accounting Jargon Defined

FOB Shipping Point
FOB shipping point means that a business event took place at the vendor's site. The buyer pays all freight expenses associated with the acquired items. Freight commonly refers to semi-trucks that transfer substantial distributions of goods from the vendor's place to the purchaser's site.

FOB Destination
FOB destination represents a business event where a seller is responsible for all freight payments. Vendors will often pay the freight company upfront for all shipping costs at the time of the transaction. The vendor will normally not charge buyers for the freight cost in this transaction, although this is may not always be true as some vendors will seek freight cost reimbursement from a purchaser.

Concluding Thoughts

A transaction under FOB destination is not complete until the items reach the customer’s site or place of use or business. The vendor supervises all freight activities that occur throughout shipping. For instance, damages to goods delivered by means of freight are an additional fee to the vendor, in most cases.

Goods delivered as FOB shipping point – called transportation-in with some accountants or companies – belong to an asset total cost. For instance, huge equipment acquired under FOB shipping point will definitely have the equipment cost and freight charges included as part of the total asset amount on the company’s balance sheet. FOB destination – or transportation out – is a period cost and must be expensed in the same period when the organization receives the goods, per the financial accounting matching concept.

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