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
|
This comment has been removed by a blog administrator.
ReplyDeleteThis 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.
ReplyDeletepurchased 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?
ReplyDeleteThese entries are in the books of the buyer, not the seller's as stated
ReplyDeleteIncredible articles and awesome, Your blog furnished us with important data to work with. Each tip of your post are amazing. we provide Random name generator at affordable prices. for more info visit our website.
ReplyDeleteTally training is best job oriented training for commerce as well as non-commerce/arts students, those who are seeking immediate employment can join this course
ReplyDeleteTally Training Institute in Delhi