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FOB Shipping-Definition and Accounting Treatment

FOB is the short form for “Free on Board Shipping Point”. FOB Shipping is a shipping agreement where buyer become the owner of the goods at the time goods are shipped from supplier’s premises.

Accounting Treatment of FOB Shipping

Buyer should add it to his inventory at the time goods are shipped.

Seller Should record it as Sales at the time goods leave his premises.

Buyer will record double entry in accounting system as

  Dr ($) Cr ($)
Purchases xxx
Account Payables Xxx

Whilst, Seller will record the following entry in fob shipping terms,

  Dr ($) Cr ($)
Sales Xxx
Account Receivables Xxx

Reason for Such Accounting Treatment

As we discussed in the introduction, in this type of shipping agreement, Buyer become the owner of goods at the time goods leave the shipping dock of supplier. Therefore, all the risks and rewards are transferred to the buyer immediately.

Who bears the costs of shipping under FOB?

The answer is “Buyer”. Buyer will record the following double entry under FOB Shipping;

  Dr ($) Cr ($)
Freight in xxx
Bank xxx

Who is responsible, if under fob shipping goods are damaged in transit?

The answer is “Buyer”, because risk and rewards both are transferred to the buyer immediately after the goods are shipped by supplier.

Example

Assume NHIRKM Engineers is a company in Pakistan and Smart Limited is in USA. NHIRKM Engineers buys computers under FOB Shipping Agreement from Smart Limited. Assume the price of computers as $100,000 and delivery charges of $20,000. Now,

 NHIRKM should record it as an increase in their inventory at the time computers leaves the premises of Smart Limited.

  Dr Cr
Purchases 100,000
Accounts Payables-Smart Limited 100,00

As the freight charges are to be paid by NHIRKM Engineers, so they will record the following double entry for freight charges under FOB shipment.

  Dr ($) Cr ($)
Freight in 20,000
Bank 20,000

Smart Limited should record it as a sale and at the time computers leaves the premises of Smart Limited.

  Dr Cr
Sales 100,000
Accounts Receivables-NHIRKM Engineers 100,00

Consequently, if any damage happens to the computers during the shipment, NHIRKM is solely responsible, it cannot claim any damages from Smart Limited.

Note:

FOB Shipping point is different from FOB Destination where the buyer become owner of the goods at the time goods are received by the buyer at his premises whilst, seller records it is a sale when the goods are received by buyer.

Practice Question:

Dewai Ltd which is in India buys smartphone from XYY Ltd which is in China, under FOB Shipping terms. These smartphones costs $50,000 and the freight charges are $6,000.

Who is responsible if goods are damaged in the process of delivery?

What is FOB Shipping?

Record double entry under FOB shipping for both buyer and seller.

Submit your responses to [email protected] and get a response within 8 hours. You can also ask questions in the comment section. Similarly, you can also demand a topic to be explained on Sacred Accounting.

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Kamran Ullah

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