CIF vs FOB: What’s the Difference?

Alternatively, FOB destination places the burden of delivery on the seller. The seller maintains ownership of the goods until they are delivered. For example, assume Company XYZ in the United States buys computers from a supplier in China and signs a FOB destination agreement. Assume the computers were never delivered to Company XYZ’s destination, for whatever reason.

Learn how Synder can solve common bookkeeping problems of e-commerce businesses with a revenue of $1 mln – $100 mln. Get free online marketing tips and resources delivered directly to your inbox. Try Shopify for free, and explore all the tools and services you need to start, run, and grow your business. CIF is a more expensive contract option than FOB, as it demands more effort and expense on the part of the supplier. To further clarify, let’s assume that Claire’s Comb Company in the US purchases a container of The Wonder Comb from a supplier based in China.

Smaller companies may prefer the larger party to assume liability, as this can result in lower costs. A seller with expertise in local customs that the buyer lacks would likely assume CIF responsibility to encourage the buyer to accept a deal. FAS. Free Alongside, which means that the seller must deliver goods on a ship that pulls up next to a ship of a certain name, close enough that the ship can use its lifting devices to bring it onboard. Similarly, the buyer needs to update their inventory and make a note of the incoming shipment. They need to update the records even if they are yet to receive the shipment. Unlike FOB shipping, the supplier is not required to ensure the safe movement from port to ship.

Accounting: What the Numbers Mean

With an automated system, the work can be done more quickly and accurately. It helps lower costs by reducing delays in delivery times, which means customers will receive their shipments faster than they would otherwise. In the FOB shipping point, when the buyer gets the responsibility of the goods from the buyer, they can make an entry in their inventory list.

• If the goods are damaged in transit, the buyer should file a claim with the insurance carrier, since the buyer has title to the goods during the period when the goods were damaged.
• In contrast to the FOB shipping point, the seller may bear the risk of loss and responsibility for transportation expenses while the goods are in transit.
• Once the goods reach the origin point, the buyer needs to assume responsibility for the consignment.
• Free on board shipping point and free on board destination are two of several international commercial terms published by the International Chamber of Commerce.

FOB terms like FOB Origin and FOB Destination help define ownership, risk, and transportation costs for both buyers and sellers. FOB Incoterms are also the most cost-effective option, as it allows the buyer to shop for the best possible shipping rate. While the transfer of risk occurs when the goods are safely loaded onto the shipping vessel, the buyer’s forwarder is responsible for the entire transportation process. Once the cargo leaves the seller’s warehouse, the buyer is in possession of the load, and can better control the successful outcome of their shipment. With a CIF agreement, the seller pays costs and assumes liability until the goods reach the port of destination chosen by the buyer.

Cost, Insurance, and Freight (CIF) vs. Free on Board (FOB): An Overview

Instead of relying on the supplier for part or all of the freighting process. The buyer only needs to rely on a single company throughout the transportation process, thus, minimizing the back and forth and potential for miscommunication between two shipping companies. Customer-arranged pickup, in which the buyer arranges to have the goods picked up from the seller’s location and assumes responsibility for them at that time, may replace any FOB conditions. In this circumstance, the billing staff must be notified of the changed delivery conditions so they do not charge freight to the consumer. When a product is sold “FOB shipping point,” the buyer pays the seller or supplier nothing more than the cost of transporting the product to the designated shipment point.

At the same time, even though the treadmills have not yet been delivered, the buyer has now officially taken responsibility for the goods. When at the shipping point, the buyer now has an open accounts payable balance though it also should now carry the treadmill on their financial records. The fact the the treadmills may take two weeks to arrive is irrelevant for this shipping agreement; the buyer will already possess ownership while the goods are in transit. Incoterms define the international shipping rules that delegate responsibility of buyers and sellers.

Free on Board Shipping Point vs. Free on Board Destination: An Overview

Instead of ownership transferring at the shipping point, the manufacturer retains ownership of the equipment until it is delivered to the buyer. Both parties to not enter the sale transaction into their general ledger until the goods have arrived to the buyer, and the seller retains risk of the goods while they are in transit. Since FOB shipping point transfers the title of the shipment of goods when the goods are placed at the shipping point, the legal title of those goods is transferred to the buyer. Therefore, the seller is not responsible for the goods during delivery.

By telling your forwarder what your cargo consists of from the beginning, they will help you stay prepared in the event any documentation or compliance might be required. The second reason is that they often handle the customs brokerage portion of the import. So the sooner they know what the products are, the faster they can begin preparing the documentation needed to import. When transporting products to a customer, the two basic alternatives are FOB shipping point or FOB destination.

How effective products move from the vendor to the customer depends on how well both sides understand free on board . FOB conditions may affect inventory, shipping, and insurance expenses, regardless of whether the transfer of products happens domestically or internationally. The buyer and seller’s bill of sale or other agreement determines ownership; FOB status only indicates which party is responsible for the cargo from beginning to end. With the FOB shipping point, the buyer takes the responsibility for lost or damaged goods and freight. The FOB destination is often used in international sales contracts but can also be used to be more specific about when or where the seller must deliver. Buyers generally consider FOB agreements to be cheaper and more cost-effective.

As with all Incoterms, FOB does not define the point at which ownership of the goods is transferred. In FOB shipping point agreements, the seller pays all transportation costs and fees to get the goods to the port of origin. Once the goods are at the point of origin and on the transportation vessel, the buyer is financially responsible for costs to transport the goods such as customs, taxes, and fees. For international trade, contracts establish and outline provisions–such as the FOB designation, payment terms, time and place of delivery–for shipments that are being made out of the country. The buyer takes responsibility for the transport cost and liability during transportation. “FOB Destination” means that the transfer completes at the buyer’s store and the seller is responsible for all of the freight costs and liability during transport.

FOB Shipping Point vs. FOB Destination: What’s the Difference?

There are certain situations when CIF is the better option to use when shipping and receiving goods. It’s a good idea to use a CIF contract when buyers deal with international suppliers, especially when sellers have easy and direct access to shipping vessels. CIF agreements cut down the need for buyers to take care of logistics in areas where they may not have experience, so all they need to do is simply take possession of the shipment once it arrives. Keep in mind, though, that CIF agreements are normally much more expensive than others. The goods are considered to be delivered into the control of the buyer as soon as they’re loaded onto the ship.

Transfer of ownership occurs when the goods have been delivered to the point of origin . Cost and freight obligates a seller to arrange sea transportation and provide the buyer the needed documents to retrieve the goods upon arrival. “FOB Destination” means the seller retains the risk of loss until the goods reach the buyer.

Prepaid and add- The seller has to pay the transportation charges in advance, but the buyer gets these charges reimbursed by adding the same to the invoice. Shipping terms affect the buyer’s inventory cost because inventory costs include all costs to prepare the inventory for sale. This accounting treatment is important because adding costs to inventory means the buyer does not immediately expense the costs and this delay in recognizing the cost as an expense affects net income. Free on board, also referred to as freight on board, only refers to shipments made via waterways, and does not apply to any goods transported by vehicle or by air. Below we have included a list of the route timelines and estimated rates to ship standard containers via FOB from China.

Freight

The fob shipping point means will assume responsibility for the office supplies even as they are yet to receive possession of the goods. The company will also have an open accounts payable balance and will soon mention office supplies in its financial statements. It does not matter how long it takes for the shipment to arrive at its destination. Depending on the agreement with your supplier, your goods may be considered delivered at any point between the port of destination and your final delivery address. The term ‘free’ refers to the supplier’s obligation to deliver goods to a specific location, later to be transferred to a carrier. In the case of a FOB destination, the ownership of the product is transferred from the seller to the buyer only upon receipt of goods at the buyer’s place.

• Freight on Board , also referred to as Free on Board, is an international commercial law term published by the International Chamber of Commerce .
• LCL), your cargo will be loaded onto the truck and taken to a warehouse to consolidate your shipment with the other consignments sharing the same container.
• It is much easier to determine when title transfers by referring to the agreed upon terms and conditions of the transaction; typically, title passes with risk of loss.

Further to that, it has been found in the US court system that “Freight On Board” is not a recognized industry term. Use of the term “Freight On Board” in contracts is therefore very likely to cause confusion. Sometimes FOB is used in sales to retain commission by the outside sales representative. Sale is recorded in the general ledger when the goods have been delivered to the buyer.

From that point, buyers need to bear all the expenses for further transport. When it comes to the FOB shipping point option, the seller assumes the transport costs and fees until the goods reach the port of origin. FOB is a viable agreement for most bulk cargo that will be shipped by sea.

Thus, the sale is recorded when the shipment leaves the seller’s facility, and the receipt is recorded when it arrives at the buyer’s facility. This means there is a difference between the legal terms of the arrangement and the typical accounting for it. The transportation department of a buyer might insist on FOB shipping point terms, so that it can take complete control over the delivery of goods once they leave a supplier’s shipping dock. The fitness equipment manufacturer is responsible for ensuring the goods are delivered to the point of origin. This is the point of primary transportation in which the buyer will now assume responsibility for the treadmills.

However, the vast majority of the quotes you will receive from sellers in China will be under FOB Incoterms. If you look at a quotation, you will usually see the unit price, FOB as the Incoterm, and a Chinese city, the shipping point. The International Chamber of Commerce publishes 11 Incoterms that outline the roles of both sellers and purchasers in global shipments. The ICC reviews and updates these terms once every decade; the next update is in 2030. We’ve been in the transportation and logistics business for a long time, helping companies of all shapes and sizes grow and prosper.

Buyers need to assume responsibility for the shipment from this point and need to bear risks during the transportation. FOB shipping point is a term used in the shipping of goods and services. It refers to the earliest point at which title and risk of loss pass from the seller to the buyer . When the shipment leaves a warehouse, the buyer assumes its responsibility and needs to pay the delivery charges. Since the buyer takes ownership at the point of departure from the supplier’s shipping dock, the supplier should record a sale at that point.

On our UPS® Forwarding Hub, get and compare quotes, book shipments, and track them end-to-end on one modern, easy-to-navigate dashboard. We can help you mitigate risk, improve cash flow, print 3D and a host of other surprises. Ana Misiuro is an editor and content creator with Synder who writes about the intricacies of online marketing and e-commerce. Once a newbie herself, she knows the importance of understanding the basic concepts and learning from best practices when you’re just starting in the world of e-commerce. She holds a degree in Linguistics and her interests span public relations, advertising, sales, marketing, psychology and health. For example, if you’re importing high-value items like electronics or jewelry, DDP may not be an ideal option because it can leave you with large customs duties to pay when you cross borders.

Conversely, when you are selling to an overseas buyer, it is in your best interest for the buyer to become responsible as soon as it leaves your loading dock. FCA. Free Carrier, which means that the seller is obligated to deliver goods to an airport, shipping port, or railway terminal where the buyer has an operation and can take delivery there. Businesses use it when there are transactions across international borders. The primary difference between the two is the ownership of the shipment when it is in transit.