Chapter 5: Transportation Costs and Ownership Transfer

FOB destination

It means ownership of goods transfers to the buyer when the goods arrive at the buyer's place of business. The seller is responsible for paying shipping charges and bears the risk of damage or loss in transit. The seller does not record revenue from this sale until goods arrive at the destination because this transaction is not complete before that point.

What does FOB destination mean?

It means that the seller transfers ownership of goods to the buyer when they arrive at the buyer's place of business. It also means that the seller is responsible for paying shipping charges and bears the risk of damage or loss during shipment.

FOB shipping point also called FOB factory FOB = Free on Board

It means the buyer accepts ownership when the goods depart the seller's place of business. The buyer is then responsible for paying shipping costs and bearing the risk of damage or loss when goods r in transit.

Supplementary Records or Supplemental Records

It refers to information outside the usual general ledger accounts.

Point 1

Point 1: The party not responsible for shipping costs sometimes pays the carrier. In these cases, the party paying these costs either bills the party responsible or, more commonly, adjust its account payable or account receivable with the other party. Ex. A buyer paying a carrier when terms r FOB destination can decrease its account payable to the seller by the amount of shipping cost.

Point 2

Point 2: With tracking numbers it is possible to know the exact time shipped goods arrive at their destination.

Point 3

Point 3: Some companies have separate accounts for purchase discounts, returns and allowances, and transportation-in. These accounts r then transferred to merchandise inventory at period end. This is a hybrid system of perpetual and periodic. That is, merchandise inventory is updated on a perpetual basis, but only for purchases and cost of goods sold.

Point 4

Point 4: A seller records the costs of shipping goods to customers in a Delivery Expense Account when the seller is responsible for these costs. It is also called Transportation-out or Freight-out.

Point 5

Point 5: In summary, purchases r recorded as debits to Merchandise Inventory. Any later purchase discounts, returns, and allowances r credited (decreases) to Merchandise Inventory.

Point

Point: If we place an order online and receive free shipping, we have terms FOB destination.

What does FOB means?

It means Free on Board. It is used in identifying the point when ownership transfers from seller to buyer.

Identify which items r subtracted from the list amount and not recorded when computing purchase price?

Trade Discount

How long r the credit and discount periods when credit terms r 2/10, n60?

Under credits terms of 2/10, n/60, the credit period is 60 days and the discount period is 10 days.