What is Free on Board (FOB)?

Free on Board (FOB) is one of the most commonly used Incoterms and shipping terms in both domestic and international commerce. It defines the point during transportation at which ownership, risk, and responsibility for goods transfer from the seller to the buyer. The two primary variants—FOB Origin (or FOB Shipping Point) and FOB Destination—have significantly different implications for who pays shipping costs, who bears the risk of loss or damage during transit, and how inventory and revenue are recorded on each party’s books. Understanding FOB terms is essential for accurate landed cost calculations, proper accounting, and clear allocation of responsibility in commercial transactions.

Why It Matters

FOB determines three critical things in every shipment: who owns the goods during transit, who is responsible if goods are lost or damaged in transit, and when the buyer should record the inventory on their balance sheet. Getting this wrong has real financial consequences. If a shipment is destroyed in transit under FOB Origin terms, the buyer bears the loss—even though they haven’t received the goods yet. Under FOB Destination, the seller bears that same risk until delivery is complete.

For accounting purposes, FOB determines when revenue is recognized by the seller and when inventory appears on the buyer’s books. Under FOB Shipping Point, the buyer records inventory as an asset as soon as the seller ships it—meaning goods in transit are the buyer’s inventory. Under FOB Destination, the seller retains the goods on their books until delivery, and revenue recognition may be delayed accordingly. These timing differences can significantly affect period-end financial statements.

How It Works

FOB terms are specified in purchase orders and sales contracts, establishing clear rules for each party:

• FOB Origin (FOB Shipping Point): Ownership and risk transfer to the buyer when the seller loads the goods onto the carrier at the origin point. The buyer is responsible for freight costs, insurance during transit, and any loss or damage that occurs during shipping. The buyer records the goods as inventory at the moment of shipment, and the seller recognizes revenue at the same point.
• FOB Destination: Ownership and risk remain with the seller until the goods are delivered to the buyer’s specified location. The seller pays freight costs and bears the risk of loss or damage during transit. The buyer records inventory only upon delivery, and the seller may defer revenue recognition until that point.
• Freight Collect vs. Freight Prepaid: FOB terms can be combined with freight payment terms. “FOB Origin, Freight Collect” means the buyer pays shipping and owns goods from origin. “FOB Origin, Freight Prepaid” means the seller pays shipping but ownership still transfers at origin. These combinations allow flexibility in how shipping costs are handled independent of risk transfer.
• International FOB: In international trade (Incoterms context), FOB specifically applies to ocean freight and means the seller delivers goods onto the vessel at the port of shipment. Risk transfers to the buyer once goods are on board the ship. For other modes of transport, FCA (Free Carrier) is the corresponding Incoterm.
• Landed Cost Impact: FOB terms directly affect landed cost calculations. Under FOB Origin, the buyer must add freight, insurance, duties, and handling to the purchase price to determine the true landed cost. Under FOB Destination, the purchase price more closely reflects the total delivered cost since the seller absorbs transportation expenses.

How Nventory Helps

Nventory supports FOB-aware inventory and cost tracking that properly accounts for goods in transit based on your FOB terms with each supplier. When FOB Origin terms apply, the system can record inventory as an asset upon supplier shipment and include freight costs in landed cost calculations. This ensures that inventory valuations, COGS, and gross margin reports accurately reflect the true cost of goods—whether they’re sitting in your warehouse or still on a ship crossing the ocean.