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

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

Freightcharges are paid by the seller and

Seller isresponsible 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’.

Accountingtreatment of FOB Destination

Accounting treatmentfor fob under destination point agreement is different for both supplier andbuyer from FOB Shipping.

Supplierwill not record it as a sale until goods are received by the buyer at thedestination point.

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

DoubleEntry for FOB Destination

Double Entry for Supplier

Supplierwill record the following double entry when goods are received by the buyer, underdestination fob terms:

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

Double Entry for Buyer

Buyer ofthe goods will pass the following double entry for goods received under fobdestination:

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

Who willpay the Freight charges under FOB destination terms?

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

Supplierwill pass the following double entry for freight charges;

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

Example

SupposeNHIRKM Engineers (operating in Pakistan) buys UPS from Smart Limited (operatingin US) under FOB destination terms. The agreed destination point is Karachiport. 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 goodsare received at the destination point i.e. Karachi port?

Answer:

DoubleEntry 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

Doubleentry for freight charges by Smart Limited:

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

Practice Question:

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

Required:

Under fobdestination meaning, pass general entries for both Marwa Electronics and xokoLtd.

Who isresponsible if the goods are damaged in transit?

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