ACCOUNTING FOR LETTER OF CREDIT


 Letter of credit :-  It is a document from a bank warranting that a seller will receive payment if the delivery conditions related to sale have been met. In the event that the buyer is unable to make payment on the purchase, the bank will cover the outstanding amount. LC is drawn in most international transactions where the parties in this transaction are unknown to secure the payment from the buyer the seller will ask for letter of credit.

Parties in L C :- Buyer, Buyer Bank, seller, seller bank and carrier

Stages:-

The seller and buyer after conclusion of contract the buyer bank will supply letter of contract to seller


Seller will consign goods to carrier in exchange of bill of lading



Seller will provide bill of lading to seller bank against the payment from buyer bank , after this seller bank will provides the bill of lading to buyer bank and from buyer bank it will delivered to buyer
Buyer provides bill of lading to carrier in exchange of goods







Accounting for letter of credit in the books of seller


When Buyer opens LC with its bank

SL.NO
PARTICULAR
DEBIT
CREDIT
1
Creditor  A/c      Dr
         To SBI bank LC  A/c
1000000

1000000

Debit :- Creditor A/c is current liability and Credit SBI bank LC A/C is Current Liability 

When buyer pays LC margin

SL.NO
PARTICULAR
DEBIT
CREDIT
1
Cash margin for LC A/c      Dr
         To Bank A/c
50000

50000

Debit :- Cash margin for LC A/c is current asset. 

When Buyer accepts LC liability (when the goods have reached buyer's port ) and pays the amount.

SL.NO
PARTICULAR
DEBIT
CREDIT
1
SBI bank LC A/c   Dr
         To Bank A/c
         To Cash margin for LC A/c
1000000

950000
 50000

Goods received

SL.NO
PARTICULAR
DEBIT
CREDIT
1
Purchase Import A/c   Dr
         To Creditor A/c
1000000

1000000

LC commission paid by buyer to bank

SL.NO
PARTICULAR
DEBIT
CREDIT
1
SLC A/c commission    Dr
         To Bank A/c
10000

10000


Comments

  1. marksonOctober 20, 2016 at 10:57 PM

    This comment has been removed by a blog administrator.

    ReplyDelete
  2. TradeImeXSeptember 3, 2019 at 11:12 PM

    This information is meaningful and magnificent which you have shared here about the Letter of credit. I am impressed by the details that you have shared in this post and It reveals how nicely you understand this subject. I would like to thanks for sharing this article here. tradeimex is one of the trusted global export import data provider that provides the latest information to importers & exporters.

    ReplyDelete
  3. Dirty mindNovember 4, 2019 at 9:52 PM

    purchased goods Through the Letter of Credit if we paid custom charge, transportation charge and other expenses occurred while purchasing goods from abroad in this case how to prepare journal entry in tally?

    ReplyDelete
  4. UnknownFebruary 23, 2020 at 2:44 PM

    These entries are in the books of the buyer, not the seller's as stated

    ReplyDelete

Post a Comment

Popular posts from this blog

AMALGAMATION :- JOURNAL ENTRIES IN THE BOOKS OF TRANSFEROR AND TRANSFEREE COMPANY

ACCOUNTING FOR AMALGAMATION PART-II
Amalgamation means the liquidation of one or more companies and transfer of business of liquidated entities to another entity. There may be amalgamation either transfer of two or more undertakings to an existing company or new company.
In the part -1 CLICK HERE FOR PART - I Accounting for amalgamation we learnt about nature of amalgamation and method of accounting, now we are going to learn journal entries in the event of amalgamation.
JOURNAL ENTRIES IN BOOKS OF TRANSFEROR COMPANY AND TRANSFEREE COMPANY
IN THE BOOKS OF TRANSFEROR COMPANY(SELLING COMPANY)
Accounting standard 14 is not applicable for selling company. Accounting is done with the objective of closing books of accounts and simultaneous determination of profit or loss on closing books of accounts.
CONTINUE READING »

JOURNAL ENTRY FOR FIXED DEPOSIT( INCLUDING INTEREST AND MATURITY)

Journal Entry for Fixed Deposit
Fixed deposit Rs. 100000/- was deposited in SB BANK
                   Fixed Deposit A/C             Dr      100000                              To SB BankA/C                                         100000  
(Being fixed deposit was done in SB) Rules for passing Journal entry Debit Fixed deposits are treated as non-current asset or current asset is depended on maturity period, if maturity period is less than one year from the date of reporting it is treated as current asset or else treated as non-current asset. As per Real account rule (Fixed Deposit) "debit what comes into business"(Asset) Credit There are is outflow of cash from business and it has to be decreased by crediting the bank account. As per Real account rule (Bank) "Credit what goes out of business"(Asset)
CONTINUE READING »

JOURNAL ENTRY FOR SALARY (including allowance and deductions)

Journal entry for Salary: -
 Salary paid company includes allowances and deductions. Allowances are many types I am giving you some examples: -
Types of allowances:- Dearness Allowance: - It is a cost of living adjustment allowance paid to employees in India. It is calculated as a percentage of basic salary to moderate the impact of inflation on employees. The DA vary according to areas (whether rural or urban)House Rent Allowance: - It is given by employer to the employee to meet the rent expense.Performance Allowance: -It is given to employee when they achieve the target given by the employer.Transport Allowance: -It is given to employee in order to meet the expense to come to office from employee residence.Children Education Allowance: -It is paid for education of employees children.Medical Allowance: -It is given to employees to medical expenses.Uniform Allowance: -It is given to employees for the expenditure. incurred on purchase or maintenance of uniforms to wear during the performa…
CONTINUE READING »