FOB destination is a contraction of the term "Free on Board Destination." The term means that the buyer takes delivery of goods being shipped to it by a supplier once the goods arrive at the buyer's receiving dock. There are four variations on FOB destination terms, which are:
- FOB destination, freight prepaid and allowed. The seller pays and bears the freight charges and owns the goods while they are in transit. Title passes at the buyer's location.
- FOB destination, freight prepaid and added. The seller pays the freight charges but bills them to the customer. The seller owns the goods while they are in transit. Title passes at the buyer's location.
- FOB destination, freight collect. The buyer pays the freight charges at time of receipt, though the supplier still owns the goods while they are in transit.
- FOB destination, freight collect and allowed. The buyer pays for the freight costs, but deducts the cost from the supplier's invoice. The seller still owns the goods while they are in transit.
Thus, the key elements of all the variations on FOB destination are the physical location during transit at which title changes and who pays for the freight. If a buyer's transportation department is proactive, it may avoid FOB destination terms, instead favoring FOB shipping point terms so that it can better control the logistics process.
Any type of FOB terms may be superseded if a customer elects to override those terms with customer-arranged pickup, where a customer arranges to have goods picked up at the seller's location, and takes responsibility for the goods at that point. In this situation, the billing staff must be aware of the new delivery terms, so that it does not bill freight to the customer.
Since the buyer takes ownership of the goods at its own receiving dock, that is also where the seller should record a sale.
The buyer should record an increase in its inventory at the same point (since the buyer is undertaking the risks and rewards of ownership, which occurs at the point of arrival at its shipping dock). Also, under FOB destination terms, the seller is responsible for the cost of shipping the product.
If the goods are damaged in transit, the seller should file a claim with the insurance carrier, since the seller has title to the goods during the period when the goods were damaged.
In reality, the shipper will probably record a sale as soon as merchandise leaves its shipping dock, irrespective of the terms of delivery. Thus, the real impact of FOB destination terms is the determination of who pays for the freight expense.