Page 247 - Accounting Principles (A Business Perspective)

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• FOB shipping point means "free on board at shipping point". The buyer incurs all transportation costs
after the merchandise has been loaded on a railroad car or truck at the point of shipment. Thus, the buyer is
responsible for ultimately paying the freight charges.

• FOB destination means "free on board at destination". The seller ships the goods to their destination
without charge to the buyer. Thus, the seller is ultimately responsible for paying the freight charges.
• Passage of title is a term that indicates the transfer of the legal ownership of goods. Title to the goods
normally passes from seller to buyer at the FOB point. Thus, when goods are shipped FOB shipping point, title
usually passes to the buyer at the shipping point. When goods are shipped FOB destination, title usually passes
at the destination.

• Freight prepaid means the seller must initially pay the freight at the time of shipment.
• Freight collect indicates the buyer must initially pay the freight bill on the arrival of the goods.
To illustrate the use of these terms, assume that a company ships goods FOB shipping point, freight collect. Title
passes at the shipping point. The buyer is responsible for paying the USD 100 freight costs and does so. The seller
makes no entry for freight charges; the entry on the buyer's books is:
Transportation-In (or Freight-In) (+SE) 100
Cash (-A) 100
To record payment of freight bill on goods purchased.
The Transportation-In account records the inward freight costs of acquiring merchandise. Transportation-
In is an adjunct account in that it is added to net purchases to arrive at net cost of purchases. An adjunct
account is closely related to another account (Purchases, in this instance), and its balance is added to the balance
of the related account in the financial statements. Recall that a contra account is just the opposite of an adjunct
account. Buyers deduct a contra account, such as accumulated depreciation, from the related fixed asset account in
the financial statements.

When shipping goods FOB destination, freight prepaid, the seller is responsible for and pays the freight bill.
Because the seller cannot bill a separate freight cost to the buyer, the buyer shows no entry for freight on its books.
The seller, however, has undoubtedly considered the freight cost in setting selling prices. The following entry is
required on the seller's books:
Delivery Expense (or Transportation-Out Expense) (-SE) 100
Cash (-A) 100
To record freight cost on goods sold.
When the terms are FOB destination, the seller records the freight costs as delivery expense; this selling
expense appears on the income statement with other selling expenses.
FOB terms are especially important at the end of an accounting period. Goods in transit then belong to either
the seller or the buyer, and one of these parties must include these goods in its ending inventory. Goods shipped

FOB destination belong to the seller while in transit, and the seller includes these goods in its ending inventory.
Goods shipped FOB shipping point belong to the buyer while in transit, and the buyer records these goods as a
purchase and includes them in its ending inventory. For example, assume that a seller ships goods on 2009
December 30, and they arrive at their destination on 2010 January 5. If terms are FOB destination, the seller
includes the goods in its 2009 December 31, inventory, and neither seller nor buyer records the exchange

Accounting Principles: A Business Perspective 248 A Global Text