Journal Entry for FOB Destination
Overview
In accounting, FOB destination means the seller is responsible for the goods until they arrive at the customer’s destination. In this case, the journal entry for FOB destination on the seller’s side will include the delivery cost or freight out that is charged to the income statement as an expense for the period.
Free On Board or FOB destination is a freight term used in shipping. This FOB destination term determines the seller to still has responsibility for goods being shipped until they reach the customer’s destination.
In other words, the point of transfer is when the goods arrive at the customer’s destination. Additionally, the seller also has the responsibility to pay for the delivery cost.
That is why in the journal entry for FOB destination, there will be a freight out account (or delivery expense account) on the seller’s side which represents the delivery expense that the seller needs to pay for delivering goods to the customer. On the other hand, the buyer will just record the purchase transaction as the shipping cost is not their responsibility.
Journal entry for FOB destination
FOB destination on seller’s side
On the seller’s side, we can make the journal entry for FOB destination by debiting the accounts receivable or cash account and crediting the sales revenue account together with the debit of the freight out account and the credit of the accounts payable or cash account.
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable/cash | 000 | |
| Sales revenue | 000 |
| Account | Debit | Credit |
|---|---|---|
| Freight out | 000 | |
| Accounts payable/cash | 000 |
In this journal entry, the freight out account is an expense account that is charged to the income statement during the period.
The freight out account is usually recorded under the delivery expense on the income statement. That is why some companies may record this transaction in the delivery expense account.
FOB destination on buyer’s side
On the buyer’s side, the journal entry will be the debit of the purchases account and credit of the accounts payable or the cash account since the buyer is not responsible for the delivery cost in the term of the FOB destination.
| Account | Debit | Credit |
|---|---|---|
| Purchases | 000 | |
| Accounts payable/cash | 000 |
In this journal entry, the purchases account is a temporary account that will be cleared at the end of the period when we calculate the cost of goods sold. Likewise, we record this to the purchases account only when the buyer uses the periodic inventory system.
If the buyer uses the perpetual inventory system, the journal entry will be the debit of the inventory account and the credit of the accounts payable or cash account as below instead:
| Account | Debit | Credit |
|---|---|---|
| Inventory | 000 | |
| Accounts payable/cash | 000 |
The difference in the perpetual inventory system here is that the balance of the inventory needs to be updated perpetually. Likewise, the debit of the inventory in the this journal entry represents the increase of the inventory balance when the buyer receives the goods from the seller.
On the other hand, the inventory balance in the periodic inventory system only needs to be updated periodically. That is usually at the end of the accounting period when we need to calculate the cost of goods sold in order to conclude the net income on the income statement.
FOB destination example
For example, on June 1, there is a $5,000 credit sale of goods in which the freight terms are stated as the FOB destination on the sale invoice. And there is a delivery cost of $150 that has not been paid yet. (Assuming both seller and buyer use the periodic inventory system.)
What is the journal entry for the FOB destination of the above transactions?
- On the seller’s side and
- On the buyer’s side
Solution:
FOB destination on seller’s side
As the freight term is FOB destination, the seller will have the responsibility to pay for the $150 of the delivery cost. In this case, we can make the journal entry for FOB destination that includes the $5,000 sales revenue and the $150 delivery cost on the seller’s side as below:
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | 5,000 | |
| Sales revenue | 5,000 |
| Account | Debit | Credit |
|---|---|---|
| Freight out | 150 | |
| Accounts payable | 150 |
FOB destination on buyer’s side
On the buyer’s side, we can make the journal entry by debiting $5,000 to the purchases account and crediting the same amount to the accounts payable as below:
| Account | Debit | Credit |
|---|---|---|
| Purchases | 5,000 | |
| Accounts payable | 5,000 |
If the buyer uses the perpetual inventory system instead of the periodic inventory system in this example, the journal entry will change to the debit of $5,000 to the inventory account and the credit of the same amount to the accounts payable as below instead:
| Account | Debit | Credit |
|---|---|---|
| Inventory | 5,000 | |
| Accounts payable | 5,000 |
Journal entry for FOB shipping point
Another shipping is FOB shipping point in which the buyer is the one who is responsible for the goods being transported. In this case, the buyer will pay for the transportation cost. And this cost will be considered as part of the goods purchased.
FOB shipping point on buyer’s side
In this case, we can make the journal entry for FOB shipping point on the buyer’s side by debiting the transportation cost to the freight in account and crediting the same amount to accounts payable or cash account as below:
Periodic inventory system:
| Account | Debit | Credit |
|---|---|---|
| Freight in | 000 | |
| Accounts payable/cash | 000 |
| Account | Debit | Credit |
|---|---|---|
| Purchases | 000 | |
| Accounts payable/cash | 000 |
The freight in account in the above journal entry is a temporary account that adds to the cost of goods purchased. This account will be cleared at the end of the accounting period when we calculate the cost of goods sold.
And of course, this account only appears if we use the periodic inventory system. If we use the perpetual inventory system, the transportation cost will be directly added to the inventory account.
In this case, the journal entry for FOB shipping point on the buyer’s side will be the debit of the inventory account and the credit of the accounts payable or cash account instead.
Perpetual inventory system:
| Account | Debit | Credit |
|---|---|---|
| Inventory | 000 | |
| Accounts payable/cash | 000 |
In this journal entry, the amount of the debit of the inventory account here is the purchase price of goods (including taxes) plus the transportation cost.
FOB shipping point on seller’s side
On the other hand, as the seller is not responsible for paying the transportation cost under the fob shipping point, we can simply record the sale transaction as below:
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable/cash | 000 | |
| Sales revenue | 000 |
Example
For example, we still have the same transaction of the $5,000 credit sale of goods and an unpaid transportation cost of $150 as above. However, in this example, the shipping term on the invoice is stated as “FOB Shipping Point”.
In this case, we can make the journal entry for the FOB shipping point on the seller and buyer’s side as below instead:
Seller’s side:
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | 5,000 | |
| Sales revenue | 5,000 |
Buyer’s side:
| Account | Debit | Credit |
|---|---|---|
| Freight in | 150 | |
| Accounts payable | 150 |
| Account | Debit | Credit |
|---|---|---|
| Purchases | 5,000 | |
| Accounts payable | 5,000 |