How does cash on delivery work?

With "Cash on delivery" the buyer pays the courier in cash when the order arrives — the system never marks it paid automatically. To enable it in Payments you just turn the method on; optionally fill the "Note to buyer (optional)" field, which the buyer sees at checkout. Such an order stays in the "Awaiting payment" status the whole time. Remember: once the courier hands you the cash, open the order in Orders and press "Mark paid" to move the status to "Paid" — otherwise it will never become "Paid".