Freight Terms and Inventory Ownership

MJC Revised 1/2012 Page 1

When selling or buying inventory the issues of ownership arises, so the accounting field has

created methods and standards to determine who owns the inventory at the end of a fiscal period

when a physical count of the corporation’s inventory is taken.

1. Since most goods are shipped by truck in American shipping terms become an issue for

who pays for the goods and who owns them while they are on the truck in transport. The

industry has come up with the term “Free on Board” FOB and the designations of

“shipping point” and “destination” to determine when ownership transfers from the seller

to the buyer.

2. Location of the inventory is an important issue when determining ownership. Except for

consigned goods and goods sent without having a prior order the inventory is usually

owned by the person who has physical control of it. The only exception is while the

inventory is in transport.

Now we can look at how these two objectives combine to help determining ownership of

inventory.

The buyer has ownership

1. When your corporation sells goods with the terms of FOB shipping point and has

physically place the goods on a truck for transport to a customer who has order those

goods:

Ownership transfers to the customer who is the buyer at Point A the seller’s (Your

Corporation’s) place of business. The buyer would pay for the freight cost and is the

owner of the goods during transport therefore the goods are included in the customer’s

inventory.

Freight Terms and Inventory Ownership

MJC Revised 1/2012 Page 2

The buyer has ownership

2. Your corporation is purchasing inventory from a supplier. The company selling the

merchandise to you has placed the goods you ordered on the truck at their place of

business with terms of FOB shipping point.

Ownership transfers at Point A, the supplier’s place of business. Your corporation owns the

inventory the minute it goes onto the truck. Your corporation will pay the shipping cost and

owns the inventory during transport of the goods.

The seller has ownership

3. When your corporation sells goods with the terms of FOB destination and has physically

place the goods on a truck for transport to a customer who has order those goods:

Ownership transfers at Point B, the customer’s place of business. The seller, your

corporation, retains ownership of the inventory until the goods are taken off the truck at the

customer’s place of business. Your corporation owns the goods during transport and pays for

the freight cost therefore you do not remove the inventory from the corporation’s books until

it is delivered and taken off the truck at Point B.

Freight Terms and Inventory Ownership

MJC Revised 1/2012 Page 3

The seller has ownership

4. Your corporation is purchasing inventory from a supplier. The company selling the

merchandise to you has placed the goods you ordered on the truck at their place of

business with terms of FOB destination.

Ownership transfers at Point B, your corporation’s place of business. The seller, the supplier,

retains ownership of the inventory until the goods are taken off the truck at your

corporation’s place of business. Your corporation does not own the goods during transport

and does not pay for the freight cost therefore they are not included into your inventory until

after the truck arrives at your place of business, which is Point B.