When do you buy CIF and when do you buy FOB?

accounting fob

That’s because the seller may use a transport carrier of their choice who may charge the buyer more to increase the profit on the transaction. Communication may also be problematic if the buyer relies solely on people who act for the seller. The buyer may have to pay additional fees at the port, such as docking fees and customs clearance fees before the goods are cleared. Freight on Board (FOB), also referred to as Free on Board, is an international commercial law term published by the International Chamber of Commerce (ICC). It indicates the point at which the costs and risks of shipped goods shift from the seller to the buyer. The buyer records the purchase, accounts payable, and the increase in inventory on January 2 when the buyer becomes the owner of the goods.

  • When the ship’s rail serves no practical purpose, such as in the case of roll-on/roll-off or container traffic, the FCA term is more appropriate to use.
  • For businesses that ship cargo on a regular basis, freight expense will be a significant cost for the business.
  • The most significant advantage of selecting FOB is that the buyer can negotiate for freight services and get the best price.

From that point, buyers need to take care of the transportation and other costs like taxes during the delivery. The buyer has to pay for the goods to be transported from the shipping point. As the shipping costs have already been paid, the amount is owed to the seller. It’s not unusual for the sale contract to treat the sale differently from the ledger.

Insurance Claims Under FOB Shipping Point Terms

These delays can cause delays in payment and customer satisfaction issues. If there are any damages to the cargo enroute, the buyer needs to take relevant measures like filing for reimbursement claims. Since the shipment becomes the buyer’s responsibility, the seller has no further role in the process. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping.

As we already have seen with FOB, sellers do not assume much responsibility unless it is the FOB destination. Even when sellers pay for the shipment charges, they can get reimbursed by buyers based on mutual agreement. Also, under FOB shipping point terms, the customer is responsible for the cost of shipping the product.

Cost, Insurance, and Freight (CIF)

Therefore, the seller should continue to report these goods in its inventory until January 2. The seller will be responsible for the shipping costs, which will be an expense in January when the sale is reported. FOB Shipping Point means https://online-accounting.net/ that the seller transfers ownership of the goods sold at the point of origin, when the items leave the seller’s warehouse. Under FOB Shipping Point, the seller would record the sale as soon as the goods leave the seller’s premises.

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In international trade, ownership of the cargo is defined by the contract of sale and the bill of lading or waybill. Assume that a seller quoted a price of $900 FOB shipping point and the seller loaded the goods onto a common carrier on December 30. Also assume that the goods are in transit until they arrive at the buyer’s location on January 2. On December 30, the seller should record a sale, an account receivable, and a reduction in its inventory. The buyer is not responsible for the goods during transit; therefore, the buyer often is not responsible for paying for shipping costs. The buyer is also able to delay ownership until the goods have been delivered to them, allowing them to do an initial inspection prior to physically accepting the goods to note any damages or concerns.

A quick word on FOB

Once the goods are delivered to the buyer’s specified location, the title of ownership of the goods transfers from the seller to the buyer. Consequently, the seller legally owns the goods and is responsible for the goods during the shipping process. These international contracts outline provisions including the time and place of delivery as well as the terms of payment agreed upon by the two parties.

Traders told Reuters at the time that this had weighed on Russian wheat’s competitiveness, with GASC buying cheaper Romanian and French wheat instead. In a tender last week, all Russian suppliers had submitted bids at a price floor set at $270 per metric ton on a FOB basis, with C&F prices ranging between $286.25 and $291 per metric ton. Traders told Reuters the price floor was not legally binding but that suppliers were expected to follow instructions from Russia’s agriculture ministry. Traders have told Reuters the price could possibly be below an unofficial floor set by Russia’s government to control domestic wheat prices. One of the world’s biggest importers of wheat, Egypt last year started shifting towards direct purchases instead of tenders after the war in Ukraine disrupted its buying.

Difference between CIF and FOB

FOB freight prepaid and allowed specifies that the seller is obligated to pay the freight transportation charges and owns the goods while they are in transit. The seller assumes the risk of loss of or the damage of goods during transit. It signifies a transportation term used to indicate that the selling price of the goods includes delivery at the seller’s expense only up to a specified point.

For businesses that ship cargo on a regular basis, freight expense will be a significant cost for the business. They must record it appropriately in order for their financial books to be accurate. Usually, freight expenses are recorded as other “general expenses.” How the cost is recorded may depend on who is paying the freight cost and whether the cost is included in the asset’s value/price. Some of the common modes of transport that can be used include ship, airplane, train, or truck. Also, freight companies charge different freight costs depending on the weight of the cargo. There are certain situations when CIF is the better option to use when shipping and receiving goods.

Free on Board (FOB) Shipping Point

FOB is only used in non-containerized sea freight or inland waterway transport. As with all Incoterms, FOB does not define the point at which ownership of the goods is transferred. The transportation department of a buyer might insist on FOB shipping point terms, so that it can take complete control over the delivery of goods once they leave a supplier’s shipping dock. Now assume that a seller quoted $975 FOB destination and the seller loaded the goods onto a common carrier on December 30. Also assume that the goods are on the truck until January 2, when they are unloaded at the buyer’s location.

accounting fob

Whichever party pays for sending will have to enter those costs in the ledger, too. When it comes to FOB, the person responsible for the cost of sending depends on the specific terms of the arrangement, so it’s important to know the different FOB terms you might find in sending documents. In fact, the International Chamber of Commerce (ICC) published a set of international trade terms called the International Commercial Terms fiscal year definition (Incoterms) to help clarify things. With the advent of e-commerce, most commercial electronic transactions occur under the terms of “FOB shipping point” or “FCA shipping point”. In the case of a FOB destination, the ownership of the product is transferred from the seller to the buyer only upon receipt of goods at the buyer’s place. Similarly, the buyer needs to update their inventory and make a note of the incoming shipment.

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