What Is Cash on Delivery (COD)?

Cash on delivery (COD) is a type of transaction in which the recipient makes payment for a good at the time of delivery. The terms and accepted forms of payment vary according to the payment provisions of a purchase agreement. Cash on delivery can also be referred to as collect on delivery since delivery may allow for cash, check, or electronic payment.

Understanding Cash on Delivery (COD)

A cash on delivery transaction can potentially take different forms and may affect a company’s accounting in different ways. Public companies are required to use the accrual accounting method under generally accepted accounting principles (GAAP). In accrual accounting, a company recognizes revenue at the time of the transaction and records the payment in accounts receivable if the payment is deferred. Private companies can use either accrual or cash accounting. In cash accounting, the company must wait to record the transaction as revenue until payment is received.

If a customer is dealing with a merchant in person and the customer makes a purchase from readily available inventory, payment is collected at the time of sale and this can be a form of cash on delivery. Under the accrual accounting method, this leads to a shorter accounts receivable period and higher efficiency.

For longer-term accounts receivable agreements, companies can setup COD shipping which allows the customer to defer payment until the time of delivery. On certain mail order platforms such as eBay, COD can be used to help minimize the risk of fraud between buyers and sellers. Overall, COD does not require payment from a purchaser until they have received their purchase.
COD Considerations

For many businesses, in-person COD can provide for the immediate payment of goods and services. This is a significant accounting advantage since it can greatly shorten the days receivable for a business.

If a company allows for COD shipping, it is willingly giving the customer more time to make a payment with somewhat less risk than a credit purchase.

COD typically has shorter timeframes to delivery than standard invoicing. This is beneficial since the customer is required by an intermediary to pay at delivery. COD shipping offers customers the advantage in time for saving to make a full payment. Alternatively, it also increases the risk that a customer will not plan appropriately for payment, leaving the purchase to be returned. Returned purchases forego intended profits and may require shipping return fees which are both disadvantages for the merchant.

For merchants, offering a COD payment option may enhance consumer confidence in a new company that does not yet have strong brand recognition. Generally, established companies are not willing to take on the risks of COD shipping, opting more for credit payment plans that charge interest and late payment fees. In some cases though, COD can have advantages over credit since the seller receives the full payment at delivery. COD can also help merchants by avoiding some risks of buyer identity fraud, stopped payments, or electronic card disputes.

In some countries like India, cash on delivery transactions are boosting internet commerce. COD transactions can also appeal to consumers who do not have established credit or alternative means for paying for goods.
Key Takeaways

    Cash on delivery (COD) is a type of transaction in which the recipient makes payment for a good at the time of delivery.
    A COD transaction can take several different forms that affect a company’s accounting in different ways.
    COD shipping offers customers a time advantage for saving to make a full payment.