Purchases and sales of merchandise often involve freight.

The terms of a sale indicate when ownership (title)

of the merchandise passes from the seller to the buyer. This point determines whether the buyer or the seller pays
the freight costs. The passage of title also determines whether the buyer or seller must pay other costs, such as
the cost of insurance, while the merchandise is in transit.
The cost of transporting goods from the seller’s place to the buyer’s place is shouldered by either party
depending on the arrangement. The merchandise can be transported either by a trucking service, a shipping line,
or an airline. The freight term FOB is the abbreviation for free on board.

TERMS OF SHIPMENT
FOB Shipping Point means
the buyer should be the one to
pay for the cost of transporting
the goods from the seller’s place
to the buyer’s place. Once the
merchandise leaves the seller’s
place for shipping, ownership of
the goods is transferred to the
buyer. Therefore, the buyer
shoulders the cost of
transportation.

Or: Freight-in xx
Cash xx
Example
Shizet Co. in Davao purchases merchandise from Joules trading in Manila. Under the term FOB Shipping
Point, Shizet Co. should pay for the cost of transporting the goods from Manila to Davao. Once the merchandise
is delivered to the port in Manila for shipment to Davao, ownership of the goods is transferred to Shizet Co.

FOB Destination means

the seller should be the one
to pay for the cost of
transporting the goods. This
is because ownership of the
merchandise is transferred
to the buyer only when the
merchandise reaches the
buyer’s place of business.

Using the previous example of Shizet Co. in Davao who purchases merchandise from Joules Trading in
Manila, under the terms FOB Destination, Joules Trading should pay for the cost of transporting the goods from
Manila to Davao. Ownership of the goods only transfers to Shizet Co. once the goods reach Davao.
On the one hand, freight prepaid means the seller initially paid for the freight of the merchandise upon
shipment and freight collect means the freight company collects the cost of transportation from the buyer.
In the example above, under the terms freight prepaid, the seller, Joules Trading, initially pays the shipping
company. On the other hand, under the terms freight collect, the shipping company collects payment from Shizet
Co.

THE DIFFERENT TRANSPORTATION COSTS

In accounting for the cost of freight charges, it is very important to note two questions:
1. Who should pay for the freight? 2. Who actually paid for it?
The different terms in accounting for freight charges incurred in transporting the merchandise are as follows:
Who should pay for the
Terms of Freight Who paid?
freight charges?
FOB Shipping Point, freight collect Buyer Buyer
FOB Shipping Point, freight prepaid Buyer Seller
FOB Destination, freight collect Seller Buyer
FOB Destination, freight prepaid Seller Seller

FOB SHIPPING POINT, FREIGHT COLLECT

FOB Shipping Point, freight collect means that the goods are free on board up to the shipping point and the
freight company collects payment for the freight charges from the buyer. Since ownership of the goods passes to
the buyer once the goods reach the shipping point, the buyer should be the one to shoulder or pay for the cost of
freight.
ILLUSTRATION Kookie Trading in Manila purchases goods from Tuttie Merchants in Davao on credit.
Freight Charges amount to ₱5,000; Terms: FOB Shipping Point, freight collect
Under the terms FOB Shipping Point, freight collect, the merchandise is free on board up to the shipping point
in Davao. The freight company collects the freight charges from Kookie Trading, and Tuttie Merchants delivers
the merchandise to the shipping port in Davao. Once the merchandise is loaded to the carrier, ownership of the
goods is thereby transferred to Kookie Trading.
Journal entries on the books of Kookie Trading to record the freight:
Freight-in/ Merchandise Inventory 5,000
Cash 5,000
To record payment of freight charges

Journal entries on the books of Tuttie Merchants to record the freight:

There is no entry on the books of the seller, Tuttie Merchants, because Kookie Trading should shoulder
or pay the cost of the freight, and the freight company collected the freight charges from Kookie Trading.

FOB SHIPPING POINT, FREIGHT PREPAID

FOB Shipping Point, freight prepaid means that the goods are free on board up to the shipping point, and
the seller paid for the freight charges at the time of shipment. Because ownership of the goods passes to the buyer
once the goods reach the shipping point, the buyer should be the one to shoulder or pay for the cost of the freight.
However, since the seller paid for the freight at the time of shipment, the buyer should reimburse the cost of
shipment to the seller. The seller can debit this as a receivable from the buyer.
ILLUSTRATION Kookie Trading in Manila purchases goods from Tuttie Merchants in Davao on credit.
Freight charges amount to ₱5,000; Terms: FOB Shipping Point, freight prepaid
Under the terms FOB Shipping Point, freight prepaid, the merchandise is free on board up to the shipping point
in Davao. Tuttie Merchants delivers the merchandise to the shipping port in Davao and pays for the freight
charges. Since ownership of the goods is transferred to Kookie Trading once the merchandise is loaded to the
carrier, Kookie Trading should shoulder or pay for the freight charges. Since Tuttie Merchants paid the freight
charges upon shipment, Tuttie Merchants can record this as a receivable from Kookie Trading. On the other hand,
Kookie Trading should record this as a payable to Tuttie Merchants.
Journal entries on the books of Kookie Trading to record the freight:
Freight-in/ Merchandise Inventory 5,000
Accounts Payable 5,000
To record cost of freight charges

Journal entries on the books of Tuttie Merchants to record the freight:

Accounts Receivable 5,000

Cash 5,000
To record freight charges collectible from buyer

FOB DESTINATION, FREIGHT COLLECT

FOB Destination, freight collect indicates that the goods are free on board up to the destination and the freight
company collects payment for the freight charges from the buyer. Because ownership of the goods passes to the
buyer only when the goods reach the buyer’s place of business, the seller should be the one to shoulder or pay for
the cost of freight. However, since the freight company collected the freight charges from the buyer, the seller
should reimburse the buyer for the amount of freight paid. The buyer, on the other hand, can reduce its accounts
payable to the seller for the cost of transportation paid to the freight company.
ILLUSTRATION Kookie Trading in Manila purchases goods from Tuttie Merchants in Davao on credit.
Freight charges amount to ₱5,000; Terms: FOB Destination, freight collect
 Under the terms FOB Destination, freight collect, the merchandise is free on board up to its destination which
is Manila. Ownership of the goods will only be transferred to Kookie Trading once the goods reach Kookie
Trading’s place of business. Since the freight company collected the freight charges from Kookie Trading, Tuttie
Merchants should reimburse Kookie Trading for the amount of freight it paid by decreasing its collectible from
the latter. Kookie Trading, on the other hand, can reduce its accounts payable to Tuttie Merchants for the cost of
transportation paid to the freight company.
Journal entries on the books of Kookie Trading to record the freight:
Accounts Payable 5,000
Cash 5,000
To record payment of freight charges

Journal entries on the books of Tuttie Merchants to record the freight:

Freight-out 5,000
Accounts Receivable 5,000
To record freight charges

FOB DESTINATION, FREIGHT PREPAID

FOB Destination, freight prepaid means that the goods are free on board up to the destination and the seller
paid for the freight charges at the time of shipment. Because ownership of the goods passes to the buyer only
when the goods reach the buyer’s place of business, the seller should be the one to shoulder or pay for the cost of
freight.
ILLUSTRATION Kookie Trading in Manila purchases goods from Tuttie Merchants in Davao on credit.
Freight charges amount to ₱5,000; Terms: FOB Destination, freight prepaid
Under the terms FOB Destination, freight prepaid, the merchandise is free on board up to its destination which
is Manila. Ownership of the goods will only be transferred to Kookie Trading once the goods reach Kookie
Trading’s place of business. Tuttie Merchants should be the one to shoulder or pay for the cost of freight. Tuttie
Merchants delivers the merchandise to the shipping port in Davao and pays for the freight charges.
Journal entries on the books of Kookie Trading to record the freight:
There is no entry on the books of the buyer, Kookie Trading, since Tuttie Merchants actually paid for the
freight as it should.

Journal entries on the books of Tuttie Merchants to record the freight:

Freight-out 5,000
Cash 5,000
To record freight charges