What is the significance of FOB Shipping Point and FOB Destination?
Accountants report a merchandiser's and a manufacturer's revenues when a sale is made. The term, FOB Shipping Point, indicates that the sale occurred at the shipping point—at the seller's shipping dock. FOB Destination indicates that the sale will occur when it arrives at the destination—at the buyer's receiving dock.
Accountants also assume that the cost of transporting the goods corresponds to these terms. If the sale occurred at the shipping point (seller's shipping dock), then the buyer should take responsibility for the cost of transporting the goods. (The buyer will record this cost as Freight-In or Transportation-In.)
Example:
To illustrate, assume that on June 10, NetSolutions purchased merchandise as follows:
June 10. Purchased merchandise from Magna Data, $900, terms FOB shipping point.
10. Paid freight of $50 on June 10 purchase from Magna Data. NetSolutions would record these two transactions as follows:
If the sale doesn't occur until the goods reach the destination (terms are FOB Destination), then the seller should be responsible for transporting the goods until they reach the buyer's unloading dock. (The seller will record the transportation cost as Freight-Out, Transportation-Out, or Delivery Expense.)
Example: NetSolutions sells merchandise as follows:
June 15. Sold merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480.
15. NetSolutions pays freight of $40 on the sale of June 15. NetSolutions records the sale, the cost of the sale, and the freight cost as follows:
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