What impact does FOB shipping point and FOB destinations have on revenue recognition.?

Question

Which inventory costing method is GAAP approved? Why?

Answer 1

Both methods are approved by GAAP. With FOB shipping point, title to the property transfers to the buyer when it leaves the shipping dock and therefore revenue should be recognized at that point. With FOB destination, title does not transfer to the buyer until they receive the goods and thus revenue is not recognized until that point.T

FOB destination can cause an issue at the the end of an accounting period as a sale invoice may have been prepared and posted to the general ledger, but if the goods were not yet received by the buyer, title did not yet transfer and the revenue should not be recognized. Thus an adjusting entry might be required.