How to record FOB shipping point in accounting?

When goods are shipped FOB (Free On Board) shipping point, the buyer assumes responsibility for the goods, including the risk of loss and the cost of transportation, as soon as the goods leave the seller's premises. The buyer must record these shipping charges as Transportation In (or Freight In), which are capitalized as part of the cost of the inventory.

Understanding FOB Shipping Point

FOB Shipping Point is a crucial shipping term that dictates when the ownership of goods, along with the risk and cost of transport, transfers from the seller to the buyer.

Title Transfer: Under FOB Shipping Point, the title to the merchandise transfers from the seller to the buyer at the seller's shipping dock or warehouse.
Risk of Loss: The buyer assumes the risk of damage or loss to the goods while they are in transit.
Shipping Costs: The buyer is responsible for arranging and paying for the shipping charges.
Buyer's Responsibility: Since the buyer takes ownership at the shipping point, they are responsible for shipping and must pay and record for shipping. Buyers must record shipping charges as transportation in (or Freight In) when the goods were shipped FOB shipping point and they have received title to the merchandise. These costs are considered part of the "landed cost" of the inventory.

Recording Shipping Costs from the Buyer's Perspective

From the buyer's accounting perspective, shipping costs incurred under FOB Shipping Point are not treated as an immediate expense but rather as an additional cost of acquiring the inventory. This is because these costs are necessary to get the inventory into a condition and location ready for sale.

Journal Entry for the Buyer

When the buyer incurs shipping costs for merchandise purchased FOB Shipping Point, these costs are added directly to the cost of the inventory.

Example:
A retail company purchases 100 units of merchandise for $1,000. The shipping terms are FOB Shipping Point, and the buyer pays a shipping company $50 to deliver the goods.

To record the purchase of merchandise:
| Date | Account | Debit | Credit |
| :--- | :------------------ | :------- | :------- |
| XXX | Inventory | $1,000 | |
| | Accounts Payable | | $1,000 |
| | To record merchandise purchase on account | | |
To record the shipping charges:
| Date | Account | Debit | Credit |
| :--- | :---------------------- | :----- | :----- |
| XXX | Inventory (or Freight In) | $50 | |
| | Cash / Accounts Payable | | $50 |
| | To record transportation in for inventory | | |
- Debit Inventory: This increases the value of the inventory asset on the balance sheet.
- Credit Cash/Accounts Payable: This decreases cash (if paid immediately) or increases the liability (if paid later).

Importance of "Transportation In" (Freight In)

The "Transportation In" or "Freight In" account is an adjunct account to inventory. It accumulates all direct costs associated with bringing inventory to the buyer's location and making it ready for sale. By including these costs in inventory, the accounting system ensures:

Accurate Inventory Valuation: The inventory on the balance sheet reflects its true cost, including all necessary acquisition expenses.
Accurate Cost of Goods Sold (COGS): When the inventory is eventually sold, the freight costs included in its value will be expensed through COGS, providing a more accurate measure of gross profit.

Recording Shipping Costs from the Seller's Perspective

Under FOB Shipping Point terms, the seller's primary responsibility for the goods ends when they are loaded onto the carrier. Therefore, the seller does not typically incur a shipping expense related to the delivery of these goods to the buyer.

No Shipping Expense: The seller generally does not record "Delivery Expense" or "Freight Out" for sales made FOB Shipping Point.
Seller Pays on Buyer's Behalf (Less Common): In some cases, the seller might pay the shipping company directly but then bill these charges back to the buyer. In this scenario, the seller would record the payment as an increase in Accounts Receivable (from the buyer) and a decrease in Cash, rather than an expense.
- Example Journal Entry (Seller's Books, if they paid for freight on behalf of the buyer):
  | Date | Account | Debit | Credit |
  | :--- | :--------------- | :---- | :----- |
  | XXX | Accounts Receivable | $50 | |
  | | Cash | | $50 |
  | | To record freight paid on behalf of buyer | | |

Impact on Financial Statements

The proper recording of FOB Shipping Point costs has a direct impact on a company's financial statements:

Balance Sheet (Buyer): The value of inventory will be higher, reflecting the inclusion of transportation costs. This directly affects the company's assets.
Income Statement (Buyer): When the inventory is sold, the higher cost of inventory (due to included freight) leads to a higher Cost of Goods Sold (COGS) and consequently a lower gross profit and net income. This ensures that the profit margin accurately reflects the full cost of acquiring and preparing the goods for sale.

Practical Insights and Best Practices

Clear Documentation: Always ensure that purchase orders, invoices, and shipping documents clearly state the FOB terms. This prevents disputes and confusion regarding who is responsible for shipping costs and when title transfers.
Accurate Costing: Proper accounting for freight-in ensures that your inventory valuation and subsequently your Cost of Goods Sold are accurate, leading to better financial reporting and decision-making.
Integration with ERP Systems: Many modern Enterprise Resource Planning (ERP) systems allow for the automatic inclusion of freight costs directly into inventory asset accounts, simplifying the process and reducing manual errors.
Consider Volume: For businesses with high volumes of incoming goods, closely tracking and allocating freight-in costs is critical for maintaining accurate inventory records and understanding the true cost of goods.

FOB Shipping Point vs. FOB Destination

Understanding the distinction between FOB Shipping Point and FOB Destination is vital for correctly recording shipping costs:

Feature	FOB Shipping Point	FOB Destination
Title Transfers	At the seller's shipping dock	At the buyer's receiving dock
Risk of Loss	Buyer assumes risk during transit	Seller assumes risk during transit
Who Pays for Freight	Buyer (directly or reimbursed to seller)	Seller
Who Records Freight Cost	Buyer (as Inventory/Transportation In)	Seller (as Freight Out/Delivery Expense)
Cost Included in Inventory	Yes, for the buyer	No, it's a selling expense for the seller