What is cash on delivery (COD)?
Payment on delivery (COD) is a type of transaction in which the recipient pays for goods at the time of delivery. The conditions and methods of payment accepted vary according to the payment provisions of a purchase contract. Cash on delivery can also be called collection on delivery because delivery can allow payment in cash, check, or electronically.
Cash on delivery (COD)
Understanding cash on delivery (COD)
A cash on delivery transaction can take many forms and affect the accounting of a business in different ways. Public companies are required to use the accrual method of accounting in accordance with generally accepted accounting principles (GAAP). In accrual accounting, a business recognizes revenue at the time of the transaction and records the payment in the accounts receivable if the payment is deferred. Private businesses can use accrual or cash accounting. In cash accounting, the company must wait to register the transaction as a product until payment is received.
If a customer does business with a merchant in person and purchases from readily available inventory, payment is collected at the time of sale, which can be a form of cash on delivery. Under the accrual method, this leads to a shorter debtor period and greater efficiency.
For longer term receivables agreements, companies can configure COD shipping which allows the customer to defer payment until the time of delivery. On some mail order platforms like eBay, COD can be used to help minimize the risk of fraud between buyers and sellers. Overall, COD does not require payment from a buyer until he has received his purchase.
For many businesses, COD in person can allow immediate payment for goods and services. This is an important accounting advantage because it can significantly reduce the days receivable for a business.
If a company allows COD shipping, it willingly gives the customer more time to make a payment with slightly less risk than a credit purchase.
COD generally has shorter delivery times than standard invoicing. This is advantageous since the customer is required by an intermediary to pay on delivery. COD shipping offers customers the advantage of saving to make a full payment. Alternatively, it also increases the risk that a customer may not plan the payment properly, leaving the purchase to be returned. Returned purchases forfeit the expected benefits and may require return shipping costs, both of which are inconvenience to the merchant.
For merchants, offering a COD payment option can boost consumer confidence in a new business that does not yet have strong brand recognition. Generally, established companies are unwilling to take the risks of COD shipping, opting more for credit payment plans that charge interest and late fees. In some cases, however, the COD may have credit advantages since the seller receives full payment on delivery. COD can also help merchants by avoiding certain risks of buyer identity fraud, blocking of payments or disputes related to electronic cards.
In some countries like India, cash on delivery transactions are driving Internet commerce. COD transactions may also be of interest to consumers who do not have established credit or other means of paying for goods.
Key points to remember
- Payment on delivery (COD) is a type of transaction in which the recipient pays for goods at the time of delivery.
- A COD transaction can take many different forms that affect the accounting of a business in different ways.
- COD shipping offers customers a time advantage to save to make a full payment.