Free On Board

Principles of Accounting

Created 2005 by Michael Worthington Elizabeth City State University

Revenue Recognition Concept

Record revenue in the period in which it is earned Fees Revenue is earned when the service is nearly complete AND Sales Revenue is earned when the _________ takes possession of the goods

FOB Point
Free On Board is the point to which the seller pays the freight costs Then the customer (buyer) pays the freight costs from the FOB Point to the delivery point
Seller

FOB Point

Buyer Buyer pays freight

Seller pays freight

Sales Recognition
Customers take possession of the goods when the legal title to the goods passes from the ____________ to the buyer Title usually passes at the FOB POINT So sales are generally recorded when shipments of goods reach the FOB POINT

Importance of FOB Point

Under the USA Uniform Commercial Code the legal title passes from the seller to the buyer at the _____________
Then the customer officially owns the goods

FOB Destination
FOB Destination means that the seller pays the entire freight charge all of the way to the customer Goods are free on board for the _________ because the buyer does not have to pay any freight costs In this case, sales are not recorded until the goods are delivered

FOB Shipping Point

FOB Dock or FOB Shipping Point means that at the shipping point, the seller merely puts the goods on the truck or railroad car from their loading dock So the buyer pays ______ of freight costs In this case, sales are recorded as soon as the goods are shipped

Timing
Terms of FOB Destination mean that the seller pays ALL of the freight costs, so the _______ passes when the goods are delivered and that is when the sale is recorded So if goods are shipped on December 31st with terms of FOB Destination, the sale is not recorded until the goods are delivered in January

More About Timing

FOB Shipping Point means that the buyer pays ________ of the freight, so title passes and the sale is recorded as soon as the seller loads the truck or railroad car If goods are shipped on December 31st with terms of FOB Shipping Point, the sale is recorded in December as soon as the goods are loaded on a truck or railroad car

FOB Destination
Goods were shipped on October 28th with terms of FOB Destination The order was delivered on November 2nd Click below on the name of the month in which the sale should be recorded October November

FOB Shipping Point

Goods were shipped on March 28th with terms of FOB Shipping Point The order was delivered on April 2nd Click below on the name of the month in which the sale should be recorded March April

Since the terms were FOB Shipping Point, the sale is recorded in March as soon as the goods are shipped

CORRECT!

Under the Uniform Commercial Code, title to goods (ownership) passes from the buyer to the seller at the FOB Point So the FOB Point determines WHO owns the goods at any point in time

THE END