Seller Entries under Perpetual Inventory Method Financial Accounting

FOB Shipping Point means the buyer is responsible for shipping and must pay and record for shipping. As the seller, we will record any shipping costs in the Delivery Expense account as a debit. We will credit cash or accounts payable, depending on if we paid it or not. Under the FOB shipping point, the seller bears the cost until the shipment reaches the supplier’s shipping dock. Once the goods are on the ship, the buyer is responsible for all the expenses, including customs, taxes, and other fees. Under FOB Destination, the seller is responsible for all costs until goods reach their destination port.

Customer-arranged pickup, in which the buyer arranges to have the goods picked up from the seller’s location and assumes responsibility for them at that time, may replace any FOB conditions. In this circumstance, the billing staff must be notified of the changed delivery conditions so they do not charge freight to the consumer. The point of FOB destination is to transfer the title to the goods to the buyer as soon as they’ve arrived at the buyer’s location. The alternative terms for recording the sale in the records fall under FOB shipping point, which indicates that the sale is recorded when the seller ships the goods. The accounting standards require that revenue is recognized when control of the goods sold is transferred to the customer.

Different terms Mean Different Accounting

So, if the goods get damaged in transit, the buyer must file a claim with the insurance company. If a shipper sends out freight, but that freight never arrives at the customer, the shipper is responsible for either replacing or reimbursing the cost of the goods. The term free on board simply refers to freight that is being shipped over water instead of land or air. About 90 percent of all global freight is shipped via ocean and sea freight.

• Sold” after they’ve transferred title and responsibility to the buyer, this is an important distinction.
• If the goods are damaged in transit, the buyer should file a claim with the insurance carrier, since the buyer has title to the goods during the period when the goods were damaged.
• The supplier is only responsible for bringing the electronic devices to the carrier.
• Once the goods are on the ship, the buyer is responsible for all the expenses, including customs, taxes, and other fees.
• Sale is recorded in the general ledger when the goods have been delivered to the buyer.

Furthermore, the goods now belong to the buyer and the buyer’s accounting books can at this point record an increase in inventory. These loading costs include customs clearance, inland haulage, demurrage if any, origin documentation charges, and origin port handling charges – in this case, the origin port is Miami. Any costs incurred for loading the goods on to the cargo ship are also the seller’s responsibility. The risks transfer to the buyer as the goods are loaded on board the ship at the port of shipment .

FOB Shipping Point vs. FOB Destination

While the tracking systems do not differ between the two fob shipping point, they have differences in when sales transactions are reported. If goods are shipped FOB shipping point, under IFRS, the total selling price of the item would be allocated between the item sold and the shipping .

They rely on trust, and are a big risk – the customer cannot assure the business that they will for sure pay for the refrigerator on delivery. In some cases, the goods also have to be transported to the buyer’s location .

What is FOB shipping point and FOB destination?

FOB Destination means that the ownership of the products transfer from the seller to the buyer only when the goods arrive at the buyer’s location, in good condition. FOB Destination is more beneficial to the buyer, whereas FOB Shipping Point benefits the seller. For example, if a company was shipping its goods to New York City, it would be written out as FOB New York. Cost of goods sold is not the price charged to customers but what a company paid for the goods they are now selling. Sales Discounts and Sales Returns and Allowances are contra-revenue accounts meaning they are REVENUE accounts but debits will increase and credits will decrease.

Should any loss or damage occur during transit, the buyer can file a claim since they are the company that holds the title at that time. On the other hand, in the case of FOB destination, it is the seller who will have the liability in case of damage or loss of goods before they reach the port of destination or buyer’s location. In such a case, the seller will have to provide the buyer with a new shipment. Only after the purchased goods have reached the buyer’s location in perfect condition does the buyer accept them.

What is the FOB Shipping Point?

Also, under FOB destination conditions, the seller is liable for the merchandise’s transportation costs. Journalize the following sales transactions for Straight Shot Archery using the periodic inventory system.