What are FOB Terms?

The term FOB is an abbreviation of free on board. If goods are shipped FOB destination, transportation costs are paid by the seller and title does not pass until the carrier delivers the goods to the buyer.

Accounting for Inventory Under FOB Terms

Good shipped under FOB terms are part of the seller’s inventory while in transit. If goods are shipped FOB shipping point, transportation costs are paid by the buyer and title passes when the carrier takes possession of the goods. These goods are part of the buyer’s inventory while in transit. The terms FOB destination and FOB shipping point often indicate a specific location at which title to the goods is transferred, such as FOB Denver. This means that the seller retains title and risk of loss until the goods are delivered to a common carrier in Denver who will act as an agent for the buyer. The rationale for these determinations originates in agency law, since transfer of title is conditioned upon whether the carrier with physical possession of the goods is acting as an agent of the seller or the buyer.