What is Payment Against Documents (PAD)

Topic Overview

  • PAD stands for Payment Against Documents.
  • PAD Creates to pay the liability of Letter of Credit (LC).
  • After getting shipping documents, the importer can contact with his bank to arrange the necessary fund for the LC payment to the beneficiary.
  • PAD duration is not more than 21 days.

What is Payment Against Documents?

After receiving the shipping documents from the exporter the negotiating bank scrutinize the documents to ensure that the documents are complied with the terms of the Letter of Credit.

Payment Against Documents (PAD) is an arrangement where an exporter instructs the presenting bank to hand over the shipping documents and tittle documents to the importer only if the importer fully pays the accompanying bill of exchange or draft. PAD also referred to ” Cash Against Documents.”

If the documents are in order payment is effected by the negotiating bank to the beneficiary (exporter) and debit the opening bank’s account, or claim reimbursement from the designated/reimbursing bank as instructed by the opening bank. The amount so credited to the customer’s account are the liability to the importer.

Accounting Entries of PDA

  1. When PAD A/c is created/Loan is sanctioned, the journal entry would be :
Goods in Transit A/c Dr
Payment Against Documents A/c (Liability A/c)Cr

(Being PAD A/c is created and loan is sanctioned)

2. When Material/Goods is received:

Stock A/c (Particular Materials A/c)Dr
Goods in Transit A/cCr

(Being the goods in Transit is received and goods-received-note (GRN ) is made.

3. When the Liability of PAD A/c is Paid:

Bank A/cCr

(Being the Liability is paid)

Normally, outstanding under Payment Against Documents (PAD) should not take more than 21 days for adjustment. If the importer paid the import bill against payment, the transactions end there and the outstanding under PAD stands liquidated.