Question

Understand shipping terms (FOB shipping point or destination). Who pays freight? How is it recorded for purchaser and how is recorded for the seller?

Answer 1

If the price of goods is quoted as FOB shipping point, the sale is assumed to be taken place once the goods are loaded on the carrier. The buyer is responsible for shipping costs. Therefore, in the case of FOB shipping point, the purchaser pays freight. The seller record the sales, accounts receivable and reduces the inventory when the goods are loaded in the carrier on the one hand. On the other hand, the purchaser records the purchase, account payable and increases inventory at the same point of time.

In accounts of seller, freight in case of FOB shipping point is recorded as freight-in

Accounts	Debit	Credit
Freight-in	XXX
Cash		XXX

If the price of goods is quoted as FOB destination, the sale is not assumed to be taken place until the goods reach to the buyer’s location. Thus, the seller is responsible for shipping costs. Therefore, in the case of FOB destination, the seller pays freight. The seller record the sales, accounts receivable and reduces the inventory when the goods are unloaded at the buyer’s location on the one hand. On the other hand, the purchaser records the purchase, account payable and increases inventory at the same point of time.

In accounts of buyer, freight in case of FOB destination is recorded as freight-out

Accounts	Debit	Credit
Freight-out	XXX
Cash		XXX