Payment Against Documents (PAD) with Accounting Treatment
Payment Against Documents (PAD) is a method of payment used in international trade transactions, particularly in import-export dealings. It involves the release of payment by the importer's bank to the exporter upon presentation of specified documents related to the shipment of goods. Here's how PAD typically works:
1. Agreement:
The exporter and importer agree to use PAD as the payment method for their transaction. This agreement is usually established in the sales contract or through prior negotiations.
2. Shipment of Goods:
The exporter ships the goods to the importer as per the terms of the sales contract. The exporter prepares and gathers all the necessary shipping documents, including the commercial invoice, bill of lading, packing list, insurance certificate, and any other documents required by the sales contract or letter of credit.
3. Presentation of Documents:
The exporter presents the shipping documents to their bank, along with instructions to forward them to the importer's bank for payment. The exporter's bank reviews the documents to ensure they comply with the terms and conditions of the sales contract or letter of credit.
4. Forwarding to Importer's Bank:
Once the exporter's bank verifies the documents, they forward them to the importer's bank, along with instructions for payment.
5. Payment Authorization:
The importer's bank reviews the documents to ensure they are in order. If the documents meet the requirements, the importer's bank releases payment to the exporter's bank as per the agreed-upon terms.
6. Transfer of Documents and Release of Goods:
Upon receipt of payment or payment authorization, the exporter's bank releases the shipping documents to the importer. The importer can then use these documents to claim possession of the goods from the shipping carrier (e.g., port authority, freight forwarder).
7. Settlement:
The importer settles the payment with their bank according to the terms of their agreement, which may involve immediate payment or payment at a later date, depending on the terms of the transaction.
In Finally :
Payment Against Documents provides security and assurance to both the exporter and importer in international trade transactions. For the exporter, it ensures that they receive payment before the importer takes possession of the goods, reducing the risk of non-payment. For the importer, it provides assurance that payment is made only upon presentation of the required shipping documents, verifying that the goods have been shipped as agreed.