CIF vs FOB: What's the Difference?

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Costs Associated with Freight on Board

Cost, insurance and freight (CIF) is another commonly used INCOTERM agreement. Under FOB destination, freight prepaid and allowed terms, the seller pays and bears the freight charges and owns the goods while they are in transit. FOB shipping point holds the seller liable for the goods until they’re transported to the customer, while FOB destination holds the seller liable for the goods until they have reached the customer. Choosing the right FOB term can significantly impact your business operations, financial records, and risk management, so consider these factors carefully.

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It’s an agreement between the buyer and seller that specifies when the ownership and liability for the goods being shipped transfer from the seller to the buyer.
Furthermore, once the goods leave the port of origin, the seller has limited control over the shipment and may face delays during transit.
In this case, the seller may take care of the shipping costs and be responsible for any transportation liabilities.
However, in this case the seller has prepaid the shipping cost on behalf of the buyer and is now owed 5,600.
When goods are labeled with a destination port, the seller stays responsible for damages, lost items, and other costs and issues until the shipment is complete.
If your business buys or sells goods overseas, choosing the best Incoterms® rule for your cargo can sometimes be confusing, especially if you’re new to the world of overseas freight shipping.

If you’re new to overseas freight shipping, navigating those uncharted waters can be confusing and overwhelming. This guide should help you gain a better understanding of at least one of the many trade terms you may encounter. This means that the buyer may have to assume liability for any extra costs, such as customs fees, and make payment once it reaches the port of destination.

FOB Destination, Freight Prepaid and Added

The supplier takes full responsibility for the computers and must reimburse Company XYZ or reship the computers. The term FOB is also used in modern domestic shipping within North America to describe the point at which a seller is no longer responsible for shipping costs. The invoice automatically does the math, including fob shipping point the subtotal, total, and amount due (you can also specify if some part of the amount has already been paid). There is also a field where you can include notes, such as shipping instructions and dates. With an accrual accounting system, income and expenses are reported as soon as cash is earned or debt is incurred.

It is important to understand the nature of the term accounting FOB, as it will affect how the freight charges are posted to the accounting records.
The seller will be responsible for the shipping costs, which will be an expense in January when the sale is reported.
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Beyond those costs, FOB terms also affect how and when a business will account for goods in its inventory.
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It says that sellers must deliver goods to a vessel for loading, with the buyer taking responsibility for bringing them onboard.

The buyer is also able to delay ownership until the goods have been delivered to them, allowing them to do an initial inspection prior to physically accepting the goods to note any damages or concerns. The fitness equipment manufacturer is responsible for ensuring the goods are delivered to the point of origin. Once the treadmills reach this point, the buyer assumes responsibility for them. The manufacturer records the sale at the shipping point, at which time they also make an entry for accounts receivable and reduce their inventory balance. With the FOB shipping point option, the seller assumes the transport costs and fees until the goods reach the port of origin.

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For example, if a company was shipping its goods to New York City, it would be written out as FOB New York.
Known as Incoterms, these terms are published by the International Chamber of Commerce (ICC) to help navigate the complexities of international trade and differing country laws.
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.
Even if you’ve decided that FOB is the best decision for you, there are still a few more nuances.
There are many factors to take into consideration when deciding which option is better for you.