Get to know the vital terms of Logistics and Supply Chain Management.
“Free On Board” is the shipping term that refers to the point at which responsibility for goods passes from the seller to the buyer. The FOB term is significant in helping to establish who bears transportation costs and at what point ownership of the goods is transferred between parties. Understanding FOB is very important to businesses concerned with buying and selling goods, particularly in cross-border trades.
In a FOB sale, the seller is liable for delivery of the goods to a point like a port or shipping terminal. Once the goods are “on board” the vessel or other transport mechanism, the liability for the shipment passes to the buyer. This liability includes the risk of loss or damage at the shipping point.
FOB designates who pays the transportation cost. If the shipment term is FOB Origin, then the buyer pays the shipping cost and assumes the risks immediately after leaving the seller’s premises. Conversely, if the shipment terms are FOB Destination, the seller pays the shipping costs and risks until the goods reach the buyer’s destination.
FOB then identifies the point at which the title of the goods is transferred from the seller to the buyer. This becomes crucial in accounting since it determines when the buyer can take possession of the merchandise for financial reporting purposes.
The moment the goods are loaded on the shipping vessel or the transport at the seller’s location, the buyer assumes ownership and responsibility. Moreover, the buyer pays for transport and bears the risk during shipment.
The seller assumes responsibility until the goods arrive at the buyer’s specified destination. The seller shall incur the transportation costs. He is responsible, too, if the goods are damaged or lost in transit.
FOB, which is an abbreviation for free on board, is the most important term that is contained in any trade agreement when outlining the definition of the transferring point of responsibility and cost between the seller and the buyer. It sets clear expectations for both parties in terms of the associated risks and expenses during transportation and therefore forms a necessary component of shipping and logistics contracts.