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


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