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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