Free on board - Definition

Free on Board (FOB) is an Incoterm. It means the same as FAS, but the seller also pays for the loading costs. The passing of risks occurs when the goods pass the ship's rail at the port of shipment.

The term is used in two common phrases "FOB shipping point" and "FOB destination". It is used to determine when the title of goods passes from the seller to the buyer. Under the terms of "FOB shipping point", the title of the goods passes to the buyer at the shipping point. Similarly, under the terms of "FOB destination", the title of the goods passes to the buyer when the goods arrives at it's destination. This is important because it determines who pays for the shipping costs of the merchandise. Whoever holds the title to the merchandise at the time of it's shipping pays for it's transportation costs. With the advent of e-commerce, most commerical electronic transactions occur under the terms of "FOB shipping point". Most analysts see this as a disadvantage of online shopping compared to traditional in-person purchasing, where "FOB destination" is more prevalent. When counting inventory, merchandise in transit plays a crucial role whether or not it is added to the company's balance sheet. Items under "FOB shipping point/destination" are checked to see if the purchaser has title of the goods. If it does, then it is added to the inventory count, but not the balance sheet. If not, it is treated as would items under consignment, meaning it still belongs to the supplier.