What is Cash on Delivery (COD)?
– Cash on Delivery (COD) is a payment arrangement in which the buyer pays for goods at the moment they are handed over by the carrier or picked up in person. Payment can be in cash or by card depending on the courier’s capabilities. COD delays cash outflow for the buyer until receipt, while the seller ships the product before being paid.
Key definitions (first time use)
– Accrual accounting: an accounting method that records revenue when it is earned (at the time of sale), not necessarily when cash is received.
– Cash accounting: an accounting method that records revenue only when payment is actually received.
– Accounts receivable (AR): amounts owed to a company by customers for goods or services already delivered.
– Cash-in-advance: a payment method where the buyer pays the seller before goods are shipped; the opposite of COD.
– Credit risk: the risk that a buyer will not pay for goods or services received.
How a COD transaction typically works (step-by-step)
1. Buyer places an order and selects COD as the payment method.
2. Seller prepares the invoice and attaches it to the shipment.
3. Carrier delivers the parcel to the buyer’s address.
4. Buyer pays the courier (cash or card) at delivery.
5. The logistics provider keeps any agreed handling/collection fee and remits the net proceeds to the seller after a set period.
6. Seller records the cash receipt (or clears AR, depending on accounting method).
Accounting and bookkeeping considerations
– Under GAAP, public companies must use accrual accounting: revenue is recognized when the sale occurs and, if payment is deferred, recorded as accounts receivable until collected.
– Private firms can use accrual or cash accounting. Under cash accounting, revenue is recorded only when the payment actually arrives.
– COD can shorten days sales outstanding (DSO) compared with invoicing on long credit terms, because payment is collected at delivery rather than waiting for invoice terms to elapse.
Operational effects on a business
– Cash flow: COD can speed cash collection relative to credit sales but is slower than cash-in-advance because logistics intermediaries may hold funds briefly.
– Logistics: sellers rely on carriers to collect and transfer funds, so carrier fees, remittance timing, and reconciliation processes are important.
– Returns and refusals: COD raises the chance of delivery refusal and return shipments; returns incur shipping costs and can hurt margins and customer experience.
– Fraud and onboarding: COD can reduce some online fraud and appeals to buyers without credit or bank payment options; it can help early-stage merchants build customer trust.
Pros and cons — buyer and seller perspectives
Advantages for sellers
– Gets payment at or near delivery, reducing credit exposure vs. invoicing.
– Can increase sales among buyers reluctant to pay upfront or without credit history.
– Reduces some kinds of electronic payment disputes and chargebacks.
Advantages for buyers
– Pay only after receiving the product, which can increase confidence in unknown sellers.
– Useful for buyers lacking cards or credit.
Disadvantages for sellers
– Higher risk of delivery refusal, which creates return shipping costs and lost sales.
– Carrier collection fees and administrative overhead.
– Potential delay between delivery and when funds are remitted.
Disadvantages for buyers
– Fewer return options in some setups; returns may be harder to process.
– Requires prompt readiness to pay on delivery.
COD vs. Cash in Advance (short comparison)
– Cash-in-advance: buyer pays before the seller ships; protects seller from nonpayment but exposes buyer to delivery risk.
– COD: seller ships before being paid; provides buyer protection and can increase purchases by buyers without payment alternatives, but seller bears greater collection and return risk.
Checklist for a business thinking about offering COD
– Decide accounting treatment: accrual or cash accounting and how COD receipts will be recorded.
– Choose carrier partners: confirm they support COD, their fees, and remittance timing.
– Set clear COD fees and who pays them (seller or buyer).
– Define return/refusal policy and who bears return shipping costs.
– Implement reconciliation procedures for COD remittances and handle exceptions.
– Communicate expectations to customers (payment methods accepted at delivery, ID requirements, refusal consequences).
– Maintain a liquidity buffer to cover returns and delayed remittances.
– Track metrics: remittance lag, refusal rate, net revenue after returns and carrier fees.
Worked numeric example
Assumptions:
– Item price: $200
– Carrier COD handling fee: 3% of collected amount + $5 flat fee
– Buyer pays $200 at delivery; carrier remits funds 7 days later
Calculations:
1. Carrier fee = 3% × $200 = $6; plus $5 fixed = $11
3. Net remittance = $200 − $11 = $189.
4. Cash timing: carrier remits $189 after 7 days → seller receives $189 on day 7 (not at delivery).
5. Expected net revenue per order (incorporating refusals)
– Additional assumption: refusal rate = 5% (0.05); return/round‑trip carrier charge borne by seller when refusal occurs = $15.
– Probability order accepted = 95% (0.95).
– Expected remittance from accepted orders = 0.95 × $189 = $179.55.
– Expected return cost from refused orders = 0.05 × $15 = $0.75.
– Expected net cash per order = $179.55 − $0.75 = $178.80.
6. Compare seller-pays-fee vs buyer-pays-fee scenarios
– If buyer pays the carrier COD fee at delivery, seller would (in practice) receive the full $200 remitted (assumption: carrier collects fee from buyer rather than deducting it). With the same refusal rate and return cost:
– Expected net cash per order = 0.95 × $200 − 0.05 × $15 = $190 − $0.75 = $189.25.
– Difference in expected net cash per order = $189.25 − $178.80 = $10.45 (advantage when buyer bears fees).
– Practical note: contract terms and carrier policy determine whether fees can be assigned to buyers and whether carriers actually remit full proceeds to sellers; verify with the carrier.
Accounting journal examples (simple, illustrative)
– Accrual accounting — at shipment (recognize sale):
– Dr Accounts receivable $200
– Cr Sales revenue $200
– On carrier remittance (seller-paid COD fee = $11; cash received $189):
– Dr Cash $189
– Dr COD/Carrier fees (expense) $11
– Cr Accounts receivable $200
– If buyer refuses at delivery (no cash collected; seller pays return shipping $15; sale reversed):
– Dr Sales returns & allowances $200
– Cr Accounts receivable $200
– Dr Return shipping expense $15
– Cr Cash (or Accounts payable) $15
– Note: include COGS and inventory entries when recognizing/returning inventory; adjust for losses/damage separately.
Operational checklist for offering COD (practical steps)
– Confirm carrier COD product details, fees, timelines and whether COD fees are deductible from proceeds.
– Decide and document who pays COD fees and return/failed-delivery charges.
– Set payment acceptance rules at delivery (cash only, cash + card, ID verification).
– Implement reconciliation process: match carrier remittance reports to shipment/invoice numbers; flag discrepancies.
– Maintain a liquidity buffer sized to cover average remittance lag × average daily COD sales + contingency (example below
Example — liquidity buffer calculation (worked numeric example)
Assumptions
– Average daily COD sales = $1,000/day.
– Average remittance lag = 7 days (time from delivery to carrier remittance).
– Contingency margin = 25% of the basic buffer (to cover spikes, reconciliations, partial remittances).
Calculation
– Basic buffer = average remittance lag × average daily COD sales = 7 × $1,000 = $7,000.
– Contingency = 25% × $7,000 = $1,750.
– Recommended liquidity buffer = $7,000 + $1,750 = $8,750.
Interpretation: Maintain approximately $8,750 in liquid working capital to avoid cash-flow stress from a typical 7‑day remittance lag given your average COD volume. Adjust inputs (lag, daily sales, contingency) to your business.
Accounting: common journal-entry patterns (assumptions and notes)
Notes on revenue recognition: Under accrual accounting (ASC 606 / IFRS 15 — revenue from contracts with customers), revenue is recognized when control of the goods transfers and collectability is probable. For COD sales, if collectability through the carrier is probable and you can reasonably measure the receivable, revenue may be recorded at delivery even though cash is remitted later. If collectability is uncertain, delay recognition until cash is received.
Typical entries when you recognize revenue at delivery (cash remitted later)
1) At delivery (recognize revenue and receivable)
– Dr Accounts receivable — COD (gross invoice) xxx
– Cr Sales revenue xxx
– Dr Cost of goods sold xxx
– Cr Inventory xxx
2) On carrier remittance when carrier pays net of fees (carrier deducts COD fees/charges before paying)
– Dr Cash (net received) xxx
– Dr COD fee expense (or Contra‑revenue) xxx
– Cr Accounts receivable — COD (gross invoice) xxx
3) If carrier pays gross and invoices you for fees separately
– On remittance: Dr Cash (full) xxx / Cr Accounts receivable — COD xxx
– When carrier invoices fees: Dr COD fee expense xxx / Cr Cash or Accounts payable xxx
If you instead choose to recognize revenue only when cash is collected (conservative approach)
– At delivery: record inventory
— At delivery: move the goods out of regular inventory into a separate “COD in transit” (or similar control) account; do not recognize revenue or cost of goods sold until cash is collected.
– Dr Inventory — COD (in transit) xxx
– Cr Inventory xxx
– (No Sales Revenue or COGS entries yet)
— On carrier remittance when carrier pays the gross invoice (carrier remits full sales price to you):
– Dr Cash (gross received) xxx
– Cr Sales revenue xxx
– Dr Cost of goods sold xxx
– Cr Inventory — COD xxx
— On carrier remittance when carrier pays net of fees (carrier deducts COD fees/charges before paying):
– Dr Cash (net received) xxx
– Dr COD fee expense (or contra‑revenue) xxx
– Cr Sales revenue (gross invoice) xxx
– Dr Cost of goods sold xxx
– Cr Inventory — COD xxx
— If carrier pays gross and later invoices you for fees separately:
– On remittance:
– Dr Cash (full) xxx
– Cr Sales revenue xxx
– Dr Cost of goods sold xxx
– Cr Inventory — COD xxx
– When carrier invoices fees:
– Dr COD fee expense (or contra‑revenue) xxx
– Cr Cash (or Accounts payable) xxx
Notes on presentation choices
– COD fee expense vs. contra‑revenue: A fee can be recorded as an operating expense (COD fee expense) or as a reduction of revenue (contra‑revenue). Presentation affects gross margin disclosure but not net profit. Choose the method consistent with company policy and financial-statement comparability.
– The “Inventory — COD” account is a control account. It keeps goods on the balance sheet until collectibility is established; it is not a revenue account.
– This conservative approach assumes accrual accounting and a policy to defer revenue until cash collection; under accounting standards (ASC 606 / IFRS 15), revenue is recognized when control transfers and collectibility is probable, so the conservative approach is a policy choice, not always required.
Worked numeric example (step‑by‑step)
– Facts: Goods cost = $60; Selling price (gross invoice) = $100; Carrier fee = $5. Carrier remits net $95 (deducts $5 fee).
1) At delivery (defer revenue; move inventory to COD):
– Dr Inventory — COD $60
– Cr Inventory $60
2) On carrier remittance (carrier pays $95 net):
– Dr Cash $95
– Dr COD fee expense $5
– Cr Sales revenue $100
– Dr Cost of goods sold $60
– Cr Inventory — COD $60
– Net effect on income statement: Sales $100 less COD fee $5 = Net revenue $95; COGS $60; Gross profit $35.
Checklist before using the “recognize on collection” method
– Confirm company policy is documented and consistently applied.
– Verify how transfer of control is determined under applicable accounting standard (ASC 606 / IFRS 15).
– Evaluate collectibility risk: if collection is not probable at delivery, deferring revenue may be appropriate.
– Decide presentation for carrier fees (expense vs. contra-revenue) and disclose policy.
– Ensure internal controls track “Inventory — COD” balances and match carrier remittances.
Ass
ss tax, regulatory, and disclosure implications. Consider whether tax authorities treat COD receipts as taxable income when received or when earned; verify any local consumer-protection rules about returned goods; and determine required disclosures about revenue recognition policies in the notes to the financial statements.
Additional checklist items (continued)
– Confirm when legal title and risk of loss transfer under contract and applicable law.
– Document responsibility for carrier remittances and timing of their remittance to your company.
– Establish procedures to clear “Inventory — COD” (or similar) when carriers remit funds or return goods.
– Train accounts receivable, inventory, and shipping teams on the chosen policy and controls.
– Plan for auditor review: maintain samples showing the flow from shipment, carrier paperwork, collection, and revenue entry.
Worked numeric examples — two methods
Assumptions used in examples:
– Customer purchase price: $200
– Carrier COD fee retained by carrier: $15
– Cost of goods sold (COGS): $120
– Carrier remits collected cash to seller when it receives funds from customer
A. Recognize revenue on collection (defer revenue until cash is collected by carrier)
Step 1 — At shipment to customer (no revenue yet; remove inventory to a temporary control account)
– Record: transfer inventory cost to a temporary balance (e.g., Inventory — COD) to show goods in transit subject to collection risk.
Example journal (at shipment)
– Dr Inventory — COD $120
– Cr Inventory $120
Step 2 — When carrier collects cash from customer and remits
– Carrier remits cash net of its fee: $200 − $15 = $185
– On receipt of remittance, recognize revenue and cost of goods sold then record the carrier fee as either an expense or contra-revenue depending on policy.
Journal on remittance receipt (recognize revenue)
– Dr Cash $185
– Dr Carrier fee expense (or contra-revenue) $15
– Cr Sales revenue $200
– Dr Cost of goods sold $120
– Cr Inventory — COD $120
Economic effect (income statement)
– Sales $200 less carrier fee $15 = net revenue $185
– COGS $120
– Gross profit $65
B. Recognize revenue at delivery (if collection is probable at delivery)
If the company’s policy and accounting analysis conclude collectibility is probable at the point of delivery, recognize revenue on delivery and record a receivable for the full sales price. If the carrier takes a fee on collection, record the fee when incurred.
Example journal (at delivery)
– Dr Accounts receivable $200
– Cr Sales revenue $200
– Dr Cost of goods sold $120
– Cr Inventory $120
When carrier remits cash and deducts fee
– Carrier remits $185
– Journal on receipt:
– Dr Cash $185
– Dr Carrier fee expense (or contra-revenue) $15
– Cr Accounts receivable $200
Economic effect (income statement)
– Sales $200 less carrier fee $15 = net revenue $185
– COGS $120
– Gross profit $65
Notes on presentation and policy choices
– Carrier fee: classify consistently. As an expense, it shows up below gross profit; as contra-revenue, it reduces reported
sales and gross profit figures differently — pick one method and apply it consistently, disclose it in accounting policies, and consider materiality.
– Presentation effects (numeric example)
– Facts (same as prior example): gross invoice price $200; COGS $120; carrier deducts $15 and remits $185.
– If carrier fee is recorded as a contra‑revenue (reduces sales):
– Journal on delivery: Dr Accounts receivable $200; Cr Sales $200; Dr COGS $120; Cr Inventory $120.
– On receipt (carrier remits $185, deducts $15): Dr Cash $185; Dr Sales returns/allowances or Contra‑revenue $15; Cr Accounts receivable $200.
– Presentation on income statement: Net sales $185; COGS $120; Gross profit $65.
– If carrier fee is recorded as an operating expense:
– Same journal on delivery as above.
– On receipt: Dr Cash $185; Dr Carrier fee expense $15; Cr Accounts receivable $200.
– Presentation on income statement: Sales $200; COGS $120; Gross profit $80; Operating expenses include carrier fee $15; Operating profit reduced to $65.
– Takeaway: Economic effect on net income is identical, but key metrics (gross margin, net sales) differ depending on classification.
– Accounting-policy checklist (what to decide and disclose)
1. Classification: contra‑revenue vs operating expense.
2. Recognition point: when to record receivable — at delivery or upon carrier remittance (typically at delivery if title and risk transferred).
3. Measurement: whether to record receivable at gross invoice and subrogate fee later, or to estimate net receivable upfront (consider materiality).
4. Tax treatment: ensure consistent treatment with tax reporting; consult tax counsel if material.
5. Disclosure: state policy in revenue recognition note and present comparatives consistently.
– Journal-entry templates (quick reference)
– At delivery (common for cash on delivery sales):
– Dr Accounts receivable (gross) — full invoice amount
– Cr Sales revenue — full invoice amount
– Dr COGS
– Cr Inventory
– On carrier remittance (contra‑revenue approach):
– Dr Cash — amount remitted
– Dr Contra‑revenue (carrier fee)
– Cr Accounts receivable — gross invoice
– On carrier remittance (expense approach):
– Dr Cash — amount remitted
– Dr Carrier fee expense
– Cr Accounts receivable — gross invoice
– Internal controls and operational checks (practical steps)
1. Reconcile carrier remittances to outstanding COD receivables daily or weekly.
2. Require carrier remittance advices or remittance reports to support cash received.
3. Segregate duties: staff who record receivables should not be sole approvers of cash deposits.
4. Record carrier fees when known; if carrier fee is uncertain at delivery, estimate and disclose methodology.
5. Review write‑offs promptly if carrier fails to remit; pursue collections or insurer/claim remedies.
– Special situations and risks
– Partial remittance or short pays: treat as receivable balance until resolved; evaluate collectibility and record bad‑debt expense if uncollectible.
– Returns and allowances: treat separately; carrier remittance does not substitute for sales returns policy.
– Third‑party carrier bankruptcy or fraud: maintain documentation of proof of delivery and carrier agreements; insurance may apply.
– Foreign currency remittances: account for FX gains/losses on timing differences between delivery and carrier remittance.
– Performance metrics to monitor
– Days sales outstanding (DSO): COD usually lowers DSO on paper if recorded at delivery; monitor cash collection timing.
– Gross margin vs adjusted gross margin: if you classify fees as contra‑revenue, gross margin reflects net revenue; if classified as expense, report an adjusted gross margin for comparability.
– Cost of collection: track carrier fees as % of sales to evaluate shipping and payment terms.
– Tax and regulatory notes (high level)
– Generally, shipping/collection fees are deductible business expenses if classified as operating expense; contra‑revenue treatment