Free On Board

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Free On Board is a historical legal term referencing the passing of title and liability between buyers and sellers of goods. Free On Board originally referenced goods transferred by ship. Since it is a legal term, and has changed in meaning over the years, some countries may have a different legal definition for it, so you'll want to consult a local attorney before using it in a contract or transaction.

Free On Board is often abbreviated as FOB.  Usually, a location follows the FOB designation.  For example, you might see FOB shipping point, also referred to as FOB origin, or FOB destination. The location is the key to how FOB is used.  The location designation is where ownership is transferred.  It’s also where responsibility for shipping costs shift from the seller to the buyer.  This is the point at which the buyer assumes responsibility to insure the goods, and suffers any damages should an accident happen while the goods are transported to another location.  

Also keep in mind that the location is where title transfers occur, meaning this is where the goods become an asset on the buyer’s balance sheet. This becomes really important (at least to accountants) during cut off periods.

For example, say Hawker Company in New York City sold one million golf balls to Slammer, Inc., in Los Angeles.  The sales price was five cents per golf ball. The sale took place on December 29th.  Hawker shipped the golf balls on December 30th and Slammer received them on January 3rd. 

Slammer’s accountants are closing the books for the year end, and need to determine if the golf balls should be included in their inventory.  If the terms of the sale are FOB shipping point New York, then title to the golf balls passes to Slammer on December 30 (the shipping date), and the inventory assets account in Slammer’s books will be fifty thousand dollars higher. If the terms are FOB destination (which was Los Angeles) then Slammer’s year-end inventory assets account will not include the fifty thousand dollars in golf balls, because Slammer did not get title to the goods (and thus did not own them) until January 3rd of the next year.

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