Journal entry for FOB shipping point
Introduction
In the freight term, FOB shipping point means that buyer is responsible for the transportation of goods. In this case, the journal entry for FOB shipping point on the buyer’s side will include the transportation cost as part of the cost of goods purchased.
FOB or Free On Board is the freight term that is usually used in shipping. This freight term is usually stated on the invoice in order to determine who is responsible for the transportation of goods, the buyer or the seller.
In accounting, the term “FOB shipping point” means the point of transfer of goods is when the goods leave the seller’s location. In order words, the buyer will bear all the risks and cost of transportation of goods.
Likewise, the transportation cost will include in the journal entry for FOB shipping point on the buyer’s side. And on the seller’s side, we will only need to record the sale transaction since the buyer is the one that is responsible for the transportation or the delivery of goods.
Journal entry for FOB shipping point
FOB shipping point on buyer’s side
On the buyer’s side, we can make the journal entry for FOB shipping point by debiting the purchases account and the freight in account and crediting the accounts payable or cash account if the buyer uses the periodic inventory system.
Periodic inventory system
| Account | Debit | Credit |
|---|---|---|
| Purchases | $$$ | |
| Freight in | $$$ | |
| Accounts payable/cash | $$$ |
In this journal entry, the freight-in account is a temporary account in which its normal balance is on the debit side. This account will be cleared at the end of the period when we calculate the cost of goods purchased. Basically, the freight-in cost here is considered as a part of the cost of goods purchased.
On the other hand, if the buyer uses the perpetual inventory system, we can make the journal entry for FOB shipping point with the debit of the inventory account and credit of the accounts payable or cash account.
Perpetual inventory system
| Account | Debit | Credit |
|---|---|---|
| Inventory | $$$ | |
| Accounts payable/cash | $$$ |
In this journal entry, the transportation costs that the buyer pay is considered part of the cost of inventory. Likewise, the debit of the inventory in this journal entry consists of the purchased merchandise (including duties and taxes) plus transportation cost.
This is because, under the perpetual inventory system, we need to update the inventory balance perpetually (i.e. whenever there is an inventory movement). Hence, we need to record the inventory transaction to the inventory account directly without the need for temporary accounts, such as purchases account or freight-in account here.
FOB shipping point on seller’s side
On the seller’s side, we can make the journal entry for FOB shipping point by debiting the accounts receivable or cash account and crediting the sales revenue account.
Periodic inventory system:
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable/cash | $$$ | |
| Sales revenue | $$$ |
If the seller uses the perpetual inventory system, the inventory balance will need to be updated immediately after the sale. In this case, we need to make another journal entry with the debit of cost of goods sold and the credit of inventory in addition to the sales revenue journal entry as below:
Perpetual inventory system:
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable/cash | $$$ | |
| Sales revenue | $$$ |
| Account | Debit | Credit |
|---|---|---|
| Cost of goods sold | $$$ | |
| Inventory | $$$ |
FOB shipping point example
For example, the company ABC makes a credit purchase of $10,000 of inventory goods from its supplier “XYZ”. In this purchase, the term “FOB Shipping Point” is stated as the freight term on the invoice. And the shipping cost of $200 has not been paid for yet.
Assuming both the company ABC and the supplier XYZ use the periodic inventory system, what is the journal entry for FOB shipping point?
- on the company ABC’s side
- on the supplier XYZ’s side
Solution:
FOB shipping point on the company ABC’s side
As the freight term on the invoice is “FOB Shipping Point”, the company ABC as a buyer will be responsible for the inventory goods on board and pay for the transportation cost.
In this case, we can make the journal entry for FOB shipping point on the company ABC’s side under the periodic inventory system by debiting the $10,000 to the purchases account and the $200 to the freight in account as below:
| Account | Debit | Credit |
|---|---|---|
| Purchases | 10,000 | |
| Freight in | 200 | |
| Accounts payable | 10,200 |
FOB shipping point on the supplier XYZ’s side
On the supplier XYZ’s side, we can make the journal entry for FOB shipping point by debiting the $10,000 to the accounts receivable and crediting the same amount to the sales revenue account.
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | 10,000 | |
| Sales revenue | 10,000 |
It may be useful to note that if the company ABC uses the perpetual inventory system, the journal entry for FOB shipping point in the example will change to below instead:
ABC’s side with perpetual inventory system
| Account | Debit | Credit |
|---|---|---|
| Inventory | 10,200 | |
| Accounts payable | 10,200 |
In this journal entry, there is no freight-in account since the balance of inventory will need to be updated perpetually. Hence, there is no need for a temporary account.
Likewise, the $200 transportation cost is included in the cost of inventory goods directly. This is because all transportation cost for delivering the inventory goods that is paid by the buyer is considered as part of the cost of the inventory on the buyer’s balance sheet.
FOB destination
Another shipping term is the “FOB Destination” which has the opposite meaning to the FOB shipping point. In other words, in FOB destination, the seller is the one responsible for goods on board and is the one who pays for transportation costs.
Likewise, the transfer point is when goods arrive at the buyer’s location. So, the seller will bear all the risks that could happen to goods being delivered until they reach the customer’s location.
FOB destination on buyer’s side
Since the buyer is not the one responsible for goods on board under the FOB destination term, we can simply make the journal entry for the purchase transaction under the periodic inventory system as below:
| Account | Debit | Credit |
|---|---|---|
| Purchases | $$$ | |
| Accounts payable/cash | $$$ |
And if the buyer uses the perpetual inventory system, it will be the debit of the inventory account instead.
| Account | Debit | Credit |
|---|---|---|
| Inventory | $$$ | |
| Accounts payable/cash | $$$ |
FOB destination on seller’s side
On the seller’s side, we can make the journal entry for FOB destination by debiting the freight out account as an expense and crediting the accounts payable or cash account together with the sale transaction as below:
| Account | Debit | Credit |
|---|---|---|
| Freight out | $$$ | |
| Accounts payable/cash | $$$ |
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable/cash | $$$ | |
| Sales revenue | $$$ |
In this journal entry, the freight out account is an expense account that the seller will need to charge to the income statement as an operating expense during the accounting period.
Example
For example, we have a $10,000 sale transaction that has been made on credit with the FOB destination term stated on the sale invoice and a $200 delivery cost that has not been paid yet. (assuming both buyer and seller use the periodic inventory system.)
In this case, we can make the journal entry for FOB destination on the buyer’s side and seller’s side as below:
Buyer’s side:
| Account | Debit | Credit |
|---|---|---|
| Purchases | 10,000 | |
| Accounts payable | 10,000 |
Seller’s side:
| Account | Debit | Credit |
|---|---|---|
| Freight out | 200 | |
| Accounts payable | 200 |
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | 10,000 | |
| Sales revenue | 10,000 |
