Professional Documents
Culture Documents
SY 2021-2022
Terms of Shipment
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.
FOB Shipping Point means that 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.
Example
Shizet Co. in Davao purchases merchandise from Joules Trading in Manila. Under the term FOB
Shipping point, Shizet Co. should pay 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.
In accounting for the cost of freight charges, it is very important to note two questions: Who
should pay for the freight? And 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 freight
Terms of Freight Who paid?
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 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 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 t Php 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.
Freight-in 5,000
Cash 5,000
Paid freight charges
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 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, buyer should be the one
to shoulder or pay for the cost of 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 Php 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.
Freight-in 5,000
Accounts Payable 5,000
Cost of freight charges
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 Php 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 palce 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.
Freight-out 5,000
Accounts Receivable 5,000
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 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 Php 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 its place of business. Tuttie Merchants delivers the merchandise to the
shipping port in Davao and pays for the freight charges.
There is no entry on the books of the buyer, Kookie Trading, since Tuttie Merchants actually paid
for the freight as it should.
Freight-out 5,000
Cash 5,000
Freight Charges
Comprehensive Illustrative Problem comparing buyer’s books and seller’s books in recording the
different terms of shipment:
Freight-in 3,000
Cash 3,000
Paid freight charges.
Analysis: The buyer should be the one to pay for the Analysis: Seller records the freight charges paid as accounts
freight charges but seller paid the freight charges at the receivable from the buyer should be the one to pay for the
time of shipment. To reimburse the seller, buyer freight charges but the seller paid for it at the time of shipment.
records the freight charges paid by the seller as
accounts payable to the seller.
Analysis: Seller should be the one to pay for the freight Analysis: Since the seller should be the one to pay for the freight
charges but the shipper collected the charges from the charges but the shipper collected the charges from the buyer,
buyer. Buyer seeks reimbursement by reducing the seller reimburses the amount of freight paid by the buyer by
account payable to the seller. crediting the accounts receivable from the buyer to deduct the
cost of freight charges from the amount collectible from the
buyer.
4. FOB Destination, Freight Prepaid 4. FOB Destination, Freight Prepaid
Freight-out 3,000
Cash 3,000
Paid freight charges
The following transactions are taken from the books of Zeus Boutique for the month of January.
Jan. 5 Zeus Boutique purchased merchandise from Circe Merchants, Php 100,000 on
account. Freight charges Php 2,000 FOB shipping point, freight collect.
Terms: 2/10, n/30
Purchases 100,000
Accounts Payable – Circe Merchants 100,000
Purchased merchandise on account
Terms: 2/10, n/30
Freight-in 2,000
Cash 2,000
To record freight charges
Analysis: FOB shipping point means that the buyer should pay for the freight charges.
Freight collect means that the buyer paid the freight charges upon shipment of
the merchandise. A second entry is made to record the freight cost paid by the
buyer.
8 Cash purchases amount to Php 65,000. Freight charges Php 4,200 FOB destination,
freight prepaid.
Purchases 65,000
Cash 65,000
Cash purchases of merchandise
Analysis: FOB destination means that the seller should shoulder the freight charges. Freight
prepaid means the freight company collected the freight charges from the seller.
No entry for freight is recorded in the books of the buyer since the freight charges
should be shouldered by the seller and the seller rightfully paid for it.
9 Zeus Boutique sold merchandise to Apollo Trading on account, Php 50,000. Freight
charges Php 2,500; FOB shipping point, freight prepaid.
Terms: 2/15, n/30
Analysis: FOB shipping point indicates that the buyer should pay for the freight charges.
Freight prepaid means that the seller paid the freight upon shipment of the
merchandise. The second entry records the freight charges as accounts receivable
from the buyer since the buyer is the one responsible for shouldering the cost of
transporting the goods.
12 Granted Apollo Trading Php 3,000 allowance for defective merchandise sold.
Freight-out 3,600
Cash 3,600
To record freight charges
Analysis: FOB destination means that the seller should pay for the freight charges. Freight
prepaid means the seller paid the freight charges upon shipment of the
merchandise. The second entry is prepared by the seller to record the cost
shouldered by him/her in transporting the goods to the buyer’s place of business.
Computation:
Amount of purchases Php 100,000
Less: Purchase discount
Php 100,00 x 2% 2,000
Cash Payment Php 98,000
Purchases 32,000
Accounts Payable – Nyx Merchants 32,000
Purchased merchandise on account
Terms: 2/10, n/EOM
Freight-in 4,000
Accounts Payable – Nyx Merchants 4,000
To record freight charges shouldered by buyer
Analysis: FOV shipping point means that the buyer should pay for the freight charges.
Freight prepaid means the seller paid the freight charges upon shipment of the
merchandise. The second entry records the freight charges as additional payable
to the seller by the buyer who is responsible for shouldering the cost of
transporting the goods.
Purchases 60,000
Accounts Payable – Medusa Merchants 60,000
Purchased merchandise on account
Terms: 1/10, n/30
Analysis: FOB destination means that the seller should pay for the freight charges. Freight
collect means that the freight company collected the freight charges from the
buyer. The second entry is prepared by the buyer to deduct the freight charges
from the account of the seller since it should be shouldered by the seller.
Cash 48,560
Sales Discount 940
Accounts Receivable – Apollo Trading 49,500
Collected account in full
Analysis: Notice that the full cash settlement includes the reimbursement of freight charges
although it is not included in the computation of the sales discount. Freight
charges, although part of the buyer’s accounts payable to the seller arising from
the purchase transaction, are not included in the computation of the sales
discount.
Analysis: Notice that the total cash settlement includes the reimbursement of freight cost
paid by the seller but the purchase discount is computed based on the amount of
purchases only. Freight not included in the computation of cash discount.
24 Zeus Boutique sold merchandise to Sphinx Traders, Php 75,000. Freight charges
Php 7,000; FOB Destination, freight collect. Terms: 1/10, n/30
Freight-out 7,000
Accounts Receivable 7,000
Freight charges
Analysis: FOB destination indicates that the seller should pay for the freight charges. Freight
collect means that the freight company collected the freight charges from the
buyer. The second entry is prepared by the seller to reimburse from the buyer
since freight should be shouldered by the seller.
Analysis: FOB shipping point means that the buyer should pay for the freight charges.
Freight collect means the freight company collected the freight charges from the
buyer. Since the buyer rightfully paid for it, there is no reason for it to be reflected
in the seller’s books.
Cash 67,250
Sales Discount 750
Accounts Receivable 68,000
Collected account in full
Computation:
Drill 1
Kuh Ting Enterprises received the following invoices from Bow Wow Trading. Determine the
amount to be remitted by Kuh Ting Entreprises to Bow Wow Trading under the following different
invoices.
Drill 2
Bean Co., established by Mr. Bean himself, began business on Sept. 1, 2016. Selected transactions
for September related to its merchandising business are given below. Assuming you are the
bookkeeper of Bean Co., record the foregoing transactions.
Sept. 1 Mr. Bean withdrew Php 1,000,000 from his personal savings account and
deposited under the account of Bean Co.
2 Cash purchases of merchandise Php 100,000. FOB Shipping point, freight collect
Php 1,200
2 Sold merchandise for Php 25,000 to Bont Trading. Terms: 1/10, n/60. FOB Shipping
point, freight prepaid, Php 660
3 Cash sales to Coco Co. Php 7,000. FOB Destination, Freight prepaid, Php 550
5 Purchased merchandise from Menggay Co. List prices was Php 60,000 with terms
of 10-5 2/10, n/60 FOB Shipping point, Freight prepaid Php 2,000
6 Returned defective merchandise to Menggay Co., Php 1,000
12 Bont Trading settled its account in full.
15 Full settlement of account with Menggay Co.
23 Reimbursed Coco Co. for allowance granted on defective goods, Php 1,200