Freight on board (FOB) accounting is a method of accounting for inventory that recognizes the transfer of ownership from the seller to the buyer when the goods are shipped. The four main entities involved in FOB accounting are the seller, the buyer, the carrier, and the destination. The seller is responsible for the goods until they are loaded onto the carrier, and the buyer is responsible for the goods from the point of shipment. The carrier is responsible for transporting the goods, and the destination is the final location of the goods.
Best Structure for Freight On Board (FOB) Accounting
Establishing a well-structured Freight On Board (FOB) accounting system is crucial for accurate tracking and management of freight expenses. The FOB structure determines the point at which the ownership and responsibility for goods transfers from the seller to the buyer, which has implications on how freight costs are recorded. Here’s a breakdown of the most effective FOB accounting structure:
1. FOB Shipping Point:
- The seller is responsible for delivering the goods to the carrier at their shipping location.
- Seller records freight costs as a deduction from sales revenue.
- Buyer records freight costs as an addition to inventory cost.
2. FOB Destination:
- The seller is responsible for delivering the goods to the buyer’s specified destination.
- Seller records freight costs as an addition to sales revenue.
- Buyer records freight costs as a deduction from inventory cost.
3. FOB Common Carrier:
- The seller delivers the goods to a common carrier (e.g., UPS, FedEx) at the shipping point.
- The buyer assumes ownership of the goods at the shipping point.
- Seller records freight costs as a deduction from sales revenue (if agreed upon).
- Buyer records freight costs as an addition to inventory cost (if agreed upon).
4. FOB Origin:
- Similar to FOB Shipping Point, but the seller is responsible for loading the goods onto the carrier’s vehicle.
- Seller records freight costs as a deduction from sales revenue.
- Buyer records freight costs as an addition to inventory cost.
5. FOB Port of Shipment:
- The seller is responsible for delivering the goods to the port of shipment.
- The buyer assumes ownership of the goods at the port of shipment.
- Seller records freight costs as an addition to sales revenue.
- Buyer records freight costs as a deduction from inventory cost.
Example:
Consider the following transaction:
- Seller sells goods to buyer for $10,000.
- FOB Destination
- Freight costs: $500
Accounting Entries:
- Seller:
- Debit: Sales Revenue $10,000
- Credit: Cost of Goods Sold $9,500
- Credit: Freight Costs $500
- Buyer:
- Debit: Inventory $10,500
- Credit: Accounts Payable $10,000
- Debit: Freight Costs $500
Question 1:
What is freight on board accounting, and how is it used?
Answer:
Freight on board (FOB) accounting is a method of recording freight costs in which the seller recognizes revenue and expenses when the goods are shipped and the buyer becomes responsible for the transportation costs. The buyer recognizes the costs as an expense when the goods are received.
Question 2:
What are the different types of FOB terms?
Answer:
There are three main types of FOB terms:
- FOB shipping point: The seller records revenue and expenses when the goods are shipped from the seller’s location.
- FOB destination: The seller records revenue and expenses when the goods are delivered to the buyer’s location.
- FOB named place: The seller records revenue and expenses when the goods are shipped to a specified location.
Question 3:
How does FOB accounting affect inventory valuation?
Answer:
Under FOB shipping point, the inventory is valued at the seller’s location. Under FOB destination, the inventory is valued at the buyer’s location. Under FOB named place, the inventory is valued at the specified location.
I hope this article has given you a good overview of freight on board accounting. It’s a fascinating topic that can have a big impact on your business, so it’s worth taking the time to understand it. If you have any further questions, please don’t hesitate to contact us. And thanks for reading! We’d love for you to visit us again later for more great content.