why letter of credit is not liability, even tough some companies shows their LC as short term liability?
how the companies will clear(pay) letter of credit?
m.rayappa reddy (student) (24 Points)
30 June 2014why letter of credit is not liability, even tough some companies shows their LC as short term liability?
how the companies will clear(pay) letter of credit?
Rama chary Rachakonda
(Master in Accounts & Lawyer email ID:ramachary64@gmail.com voice no:9989324294)
(3293 Points)
Replied 30 June 2014
Issuing Bank (Opening Bank) : The issuing bank is the one which create a letter of credit and takes the responsibility to make the payments on receipt of the documents from the beneficiary or through their banker.
CA Rakesh T
(Chartered Accountant)
(590 Points)
Replied 01 July 2014
Dear M.Reddy,
LC is not a direct liability of the company, however it is a contingent liability and hence it should be disclosed as contingent liability.
Since its a non-fund credit facility , there is in reality , no effect in the books of the company as it would record its real creditors as a liability and not the issuing bank.
Note: Its important to understand, that LC is nothing but a simple agreement between banks of buyer and seller.
Hope you have understood..
rakesh
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