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What is FOB Destination?Double entry of FOB Destination and Examples

FOB destination is used where buyer does not own the goods until received by the buyer at the destination point. In this case;

Freight charges are paid by the seller and

Seller is responsible for any damages in transit. Seller cannot claim it from buyer.

It’s just another FOB term like FOB shipping. But under FOB shipping point, buyer becomes the owner at the time goods are shipped from supplier’s dock. You should keep in mind that FOB s means ‘Free on board’.

Accounting treatment of FOB Destination

Accounting treatment for fob under destination point agreement is different for both supplier and buyer from FOB Shipping.

Supplier will not record it as a sale until goods are received by the buyer at the destination point.

Similarly, Buyer will not record it as an increase in inventory until goods are received at the destination point.

Double Entry for FOB Destination

Double Entry for Supplier

Supplier will record the following double entry when goods are received by the buyer, under destination fob terms:

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

Double Entry for Buyer

Buyer of the goods will pass the following double entry for goods received under fob destination:

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

Who will pay the Freight charges under FOB destination terms?

The answer is Supplier as risks and rewards are not transferred to the buyer until goods are received by the buyer at the destination point being agreed under fob agreement.

Supplier will pass the following double entry for freight charges;

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

Example

Suppose NHIRKM Engineers (operating in Pakistan) buys UPS from Smart Limited (operating in US) under FOB destination terms. The agreed destination point is Karachi port. The agreed fob price is $80,000 and freight charges are $17,000.

Required: Pass general entries for both NHIRKM Engineers and Smart Limited if the goods are received at the destination point i.e. Karachi port?

Answer:

Double Entry for NHIRKM Engineers:

  Dr ($) Cr ($)
Purchases 80,000
Account Payables-Smart Ltd 80,000

 Double entry for Smart Limited

  Dr ($) Cr ($)
Sales 80,000
Account Receivables 80,000

Double entry for freight charges by Smart Limited:

  Dr ($) Cr ($)
Freight out 17,000
Bank 17,000

Practice Question:

Marwa electronics (operating in India) bought several widgets from xoko Ltd (operating in China) under destination fob terms. The destination point agreed was Kochi port. Assume the price of the widgets is $89,000. Freight charges are $13,000.

Required:

Under fob destination meaning, pass general entries for both Marwa Electronics and xoko Ltd.

Who is responsible if the goods are damaged in transit?

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Kamran Ullah

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