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