How supply and demand affect FOB and sales

High School ・Accounting ・APA ・2 Sources

FOB (free on Board)

FOB (free on Board) is a contractual delivery term. This is usually based on orders made by the buyer. The FOB entails that the buyer takes the goods delivered to it by the supplier company at the point when the goods leaves the seller or supplier company warehouse. The ownership of the goods is transferred immediately the goods leave the storage point in the seller or supplier warehouse. This is based on the concept of "Sale on Delivery". In the event of damages while on transit, the buying company is responsible for incurring all the cost of damages. This is because the owner of goods has been transferred to the buying company. The main question after that is when does a company record its sales under the FOB policy? The accounting principle applied by the selling company is to record sales at the point the goods are dispatched to the customer or buyer premises. The buyer on the other hand records increases in its stock.

A factor to consider: Ethical Concerns

A factor to consider is whether the FOB is ethical or not. As far as the accounting principles and concepts are concerned, the FOB is unethical. It fails to exercise and recognize the accruals accounting concept. The concept holds that revenues are recognized when it is received and not when it is earned while accruals are recognized when incurred and not when payments are made (Mostyn, 2007). The selling company, in this case, recognize sales revenue when it is earned and not when it is received. This is revealed when the supplier company ascertains profits before they ship the goods and even forwarded the delivery date. This is very unproductive and irrelevant when buyers default on payments. It can make the company count on losses instead of profits (Weygandt, Kimmel & Kieso, 2014). The FOB policy is again unethical in the sense that once the goods are dispatched to the buyer premises, it is the buyer who is responsible for any risk of losses and damages that may arise in the process of delivery. The buying company causes the risk thus an ethical supplier should share either the cost of damages or the cost to mitigate the risk of damages. They should as well be responsible for the whole cost of damages on the goods as this may act as an after-sales service to entice the buyers to maintain a consistent purchase.

Disadvantages of the FOB Policy

The policy is not ethical to the buyer especially if the buyer operates its activities on an annual basis. The supplier company is too strict to make delivery after one week irrespective of the accounting policies applied by the buyer. In cases when the buyer experiences low inventory level at year-end and may wish to increase their stock promptly, they are likely to suffer delays when supply shifts are made. The FOB may also encourage delivery of low-quality goods since it seems to promote the principle of "buyer beware." It is the buyer to ascertain the conditions of the goods and not necessarily the supplier. The supplier may even supply goods that have expired, damaged and of low quality and lay blame on the freight owners since the goods are as well unwarranted.



Mostyn, G. (2007). Basic accounting concepts, principles and procedures. Milpitas, CA: Worthy & James Pub.
Weygandt, J., Kimmel, P., & Kieso, D. (2014). Accounting principles. Hoboken, N.J: John Wiley & Sons.

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