Meaning
A shipping agreement term establishes that the seller retains ownership and risk of loss until the goods arrive at the buyer’s specified location. When a transaction is designated as FOB destination, the supplier is responsible for organizing transport and paying the freight costs. This shipping term governs the transit phase and terminates when the buyer signs the delivery receipt.
It does not apply to shipments where the buyer collects the freight from the seller’s warehouse. Many retail distribution agreements mandate this shipping arrangement to ensure that the supplier remains accountable for transport execution.
Risk Transfer
Ownership of the cargo remains with the shipper during transit. Under the terms of FOB destination, any damage or loss that occurs during carriage is the financial responsibility of the seller. The seller must file claims against the carrier if goods are damaged in transit.
This arrangement protects the buyer from losses before the inventory is officially received.
Freight Accounting
Companies record freight costs as part of their operating expenses. Because the seller pays for transportation under FOB destination, these expenses are factored into the gross margin calculations. The seller cannot recognize revenue until the carrier delivers the goods to the buyer’s warehouse.
Delivery Verification
Logistics managers require a signed bill of lading to confirm delivery. Using FOB destination ensures that the buyer only pays for goods that successfully arrive at the warehouse.
