What Does FOB Mean on an Invoice? A Comprehensive Guide for Buyers and Sellers

Have you ever received an invoice with the term “FOB” and wondered what you’re being charged for?

Is it related to shipping costs, ownership transfer, or liability during transit?

Understanding what FOB means on an invoice is important for both buyers and sellers to avoid unexpected charges and clarify shipping obligations.

For buyers, knowing FOB helps determine when responsibility for goods transfers. For sellers, it clarifies their risks after shipment.

Our blog will provide a detailed explanation of FOB, covering its significance, advantages, disadvantages, and key differences to ensure smoother transactions and protect your financial interests.

What Do You Mean by FOB?

Free on Board (FOB), also known as freight on board, is a shipping term used in both inland waterways and international overseas transport. It indicates the point in the supply chain when a buyer or seller becomes liable for the goods shipped.

This transportation term related to international commercial law has evolved as one of the most essential concepts for decoding reliability and ownership transfer.

FOB is found on the shipping document or transportation agreements indicating who is liable for the goods damaged or destroyed during the shipping process. The purchase order between buyers and sellers sets FOB agreements and helps determine ownership, risk, and transportation costs.

These two FOB types determine who is legally responsible for the transportation cost of the goods depending on where the goods originate from or the final shipping destination.

After getting a little bit of an understanding of FOB, let’s move on to the concepts of FOB shipping point and FOB destination.

What is FOB Shipping Point?

FOB shipping point is a FOB term indicating sellers transferring the ownership of goods after the product has left the warehouse facility.

The seller records the sale for accounting purposes after the goods have been sent to the buyer. After doing so, the seller won’t be responsible for any damage caused to the product. The buyer will be responsible for any damage or loss caused to the goods during the transit.

FOB terms significantly affect shipping costs, inventory, and insurance. Recently, global freight rates have risen sharply. Between 2023 and 2024, shipping costs increased dramatically, with container rates exceeding 5,900 U.S. dollars in July 2024.

Businesses need to monitor these trends closely to manage costs effectively.

What is FOB Destination?

FOB Destination is a shipping term where the transfer of ownership happens only when the goods reach the buyer’s location, meaning the seller retains legal title until then. When compared to the FOB shipping point, the FOB destination offers more benefits to the buyer than the seller.

FOB destination protects the buyer from any unexpected losses that might occur during shipping. Similarly, the FOB shipping points benefit the seller. Suppose, the goods are shipped to Colorado, then it would be written as FOB Colorado in the invoice.

Now that you have understood the concepts of FOB Shipping Point and FOB Destination, it is time to look at the major differences between both concepts.

FOB Shipping Point vs FOB Destination

When it comes to FOB terms, understanding the distinction is important to know when you are liable to pay the transportation or shipping costs.

Here is the detailed table comparing FOB shipping point and FOB destination:

Aspect	FOB Shipping Point	FOB Destination
Ownership Transfer	The buyer assumes ownership when goods leave the seller’s premises.	The seller retains ownership until the goods reach the buyer’s location.
Risk Transfer	The buyer takes on risk as soon as the goods leave the seller’s facility.	The seller bears the risk until the goods arrive at the buyer’s location.
Shipping Costs	The buyer has to pay the shipping costs.	The seller has to pay the shipping costs.
Insurance Responsibility	Buyer must arrange for insurance during transit.	The seller is responsible for insurance until delivery.
Freight Charges on Invoice	Freight charges are billed to the buyer.	Freight charges are absorbed by the seller.
Liability for Damage	Buyer assumes liability for any damage during transit.	Buyer assumes liability for any damage during transit.
Seller’s Control Over Goods	Once shipped, the seller no longer has control over the goods.	The seller has control of the goods until delivered to the buyer.
Common Use	Typically used when the buyer wants to control shipping and delivery logistics.	Typically used when the seller offers full-service delivery and wants to maintain responsibility until delivery.
Taxation Impact	Taxes may be calculated based on the shipping location.	Taxes may be calculated based on the destination location.
Delivery Timeline	The buyer is responsible for arranging and tracking the delivery.	The seller is responsible for ensuring goods reach their destination.

What is the Significance of FOB for Small Business Accounting?

FOB plays an integral role in setting the important terms of shipping agreements for small business accounting. Free on board decides who among the buyer and seller will be liable to pay the shipping costs and who will take responsibility if the shipment is damaged, lost, or stolen.

In U.S. accounting, under FOB Shipping Point, the seller can record revenue once the goods leave their warehouse, following GAAP standards that recognize revenue when the performance obligation is fulfilled.

In the meantime, the buyer will record it in their accounting system, mentioning that the inventory has left the seller’s premises and is on route. Performing this accounting entry will convey that the inventory has now become an asset in the buyer’s accounting books even though the shipment hasn’t yet arrived.

FOB Explained: Pros and Cons of FOB Origin and FOB Destination

Evaluating the advantages and disadvantages of FOB (Free on Board) is important for buyers and sellers to navigate shipping transactions effectively without any hassle.

Advantages of FOB origin

• Low cost for sellers: In FOB origin, the seller saves a lot on shipping and insurance costs. Sellers are not responsible for goods once they are handed over to the carrier. This concept results in lesser expenses for the seller.
• Flexible for buyers: With FOB origin, buyers can choose their preferred shipping method and carrier. This helps them negotiate for better shipping rates and opt for a quicker and more affordable transportation option.
• Less seller liability: As soon as the goods are shipped, the buyer becomes responsible for the risk associated with the goods. The seller has nothing to do with the damages or losses during transit, resulting in a lower level of risk.

Disadvantages of FOB origin

• Increased risk for buyers: Once the goods are handed over to the shipping carrier, the buyer accepts all risks, which can lead to higher insurance costs, especially in the U.S. where shipping distances can be significant.
• Higher shipping costs for buyers: In FOB origin, the buyer is solely responsible for arranging and paying transportation costs. This results in buyers incurring higher shipping costs, especially when the shipping agreements with carriers are unfavorable.
• Complexity for international buyers: International buyers are responsible for navigating import rules, regulations, and taxes. This added responsibility complicates the overall shipping process and also increases costs.

Advantages of FOB destination

• Lower risk for buyers: The seller is responsible for the goods until they are delivered to their destination city, the buyer’s location. This results in reducing the buyer’s risk of loss or damage during the transit.
• Predictable costs: As the seller is paying the shipping cost, buyers don’t need to think about the variable shipping rates. The total amount paid for goods comprises shipping costs making it easier to predict the cost of goods.
• Convenient for small businesses: Small business owners or individual buyers benefit from FOB destinations because they are free from the headache of managing shipping logistics. Additionally, they do not bear any risk of damage until the goods arrive.

Disadvantages of FOB destination

• Higher cost for sellers: Sellers are responsible for the overall cost and risk associated with shipping goods. This leads to deducted profit margins, especially for long-distance or international shipments. This shipping cost is then passed on to the buyer through higher product prices.
• Lack of control for buyers: Buyers hardly have any control over the shipping method or choice of carrier. Suppose a seller opts for less reliable transportation, the buyer may experience delays in receiving goods.
• Less transparency for buyers: Buyers often have less transparency during shipping under FOB Destination, but many U.S. businesses now require tracking updates from sellers to mitigate delays or uncertainties.

What is the difference between CIF and FOB?

According to the International Trade Administration, understanding international shipping terms like CIF (Cost, Insurance, and Freight) and FOB (Free on Board) is crucial for evaluating costs, insurance, and risk transfer between buyers and sellers.

Here is the detailed comparison:

Criteria	CIF (Cost, Insurance, and Freight)	FOB (Free on Board)
Definition	The seller is responsible for the cost, insurance, and freight of the goods until they reach the buyer’s port.	The seller is not responsible for the goods until they reach the buyer’s location. Once loaded in the shipping vessel, the liability is transferred to the buyer.
Responsibility for Costs	The seller covers transportation, insurance, and shipping charges until the goods reach the destination port.	The buyer is responsible for transport costs from the point the goods are on board the vessel.
Risk Transfer Point	Risk transfers from seller to buyer when the goods reach the destination port.	Risk transfers from seller to buyer once the goods are on board the ship at the point of origin.
Insurance	The seller is required to provide insurance for the shipment until it reaches the destination port.	Buyer must arrange for insurance after the goods are on board the vessel.
Control over Shipment	The seller has more control over shipping details, including insurance and transport arrangements.	The buyer has more control after the goods are on board the ship and must handle shipping from that point onward.
Ideal for	Beneficial for buyers who want less involvement in shipping logistics and prefer the seller to handle it.	Suitable for buyers who want more control over the shipping process and are experienced in managing transportation and insurance.
Shipping Documentation	The seller provides necessary documentation, including insurance certificates.	Buyer arranges for documentation and transportation beyond the point of loading.

Role of FOB in Streamlining Your Business Transactions

Understanding FOB terms on an invoice is crucial for U.S. buyers and sellers to negotiate better deals, reduce risks, and ensure smoother, more efficient transactions. Whether you’re using FOB Origin or FOB Destination, if you know these terms, it will help you negotiate better deals and ensure a smoother transaction process.

If you are looking forward to streamlining your invoices, choose InvoiceOwl. It is one of the best invoicing software available in the market. InvoiceOwl offers customizable and professional invoices that reflect FOB terms, making your business dealings more transparent and efficient.

Last but not least, with easy-to-use and custom invoice templates, InvoiceOwl simplifies your invoicing process and enables you to focus on growing your business.