Accounting of Packing Credit Loan.

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CHANDRA GUPT (Querist)
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09 February 2011 We are availing packing credit against export orders, I want to understand how to pass entries in case as under: Our banker gives us PCFC credit on Export Orders and adjust the amount against our cash credit limits, on receipt of payment the PCFC credit is squarred up. Now my question is what our accounting is in INR what rate on PCFC credit availing and what rate i should take on receipt of payment, another issue is what would be the differencial amount be treated whether to be treaed in Exchange loss/ gain visa a versa. Pls advise

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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14 July 2024 When dealing with Packing Credit in Foreign Currency (PCFC) against export orders, and considering the accounting entries and treatment of exchange differences, here’s how you can approach it:

### 1. Accounting Entries for PCFC:

When you avail PCFC from your banker against export orders, the entries typically involve:

- **Availing PCFC:**
- Debit: Bank Account (increasing the cash credit limits)
- Credit: Packing Credit in Foreign Currency Account (PCFC Account)

- **Adjusting against Cash Credit Limits:**
- If the PCFC amount is adjusted against your cash credit limits:
- Debit: Cash Credit Account
- Credit: Packing Credit in Foreign Currency Account (PCFC Account)

### 2. Exchange Rate Considerations:

- **Availing PCFC:** The exchange rate used at the time of availing PCFC should be recorded. This rate is typically the rate provided by your banker at the time of disbursement.

- **Receipt of Payment against Export Orders:** When you receive payment against your export orders, you will convert the foreign currency received into INR. The exchange rate used for this conversion should be the rate prevailing on the date of receipt/payment.

### 3. Treatment of Exchange Gain/Loss:

- **Exchange Gain/Loss on PCFC Availing:** Any difference between the exchange rate used at the time of availing PCFC and the rate prevailing on the date of receipt/payment should be recognized as Exchange Gain or Loss.

- **Accounting Treatment:**
- **Exchange Gain:** If the INR value received upon payment is higher than the INR equivalent of PCFC availed (due to a favorable exchange rate), it results in an Exchange Gain.
- Credit: Exchange Gain Account
- **Exchange Loss:** If the INR value received upon payment is lower than the INR equivalent of PCFC availed (due to an unfavorable exchange rate), it results in an Exchange Loss.
- Debit: Exchange Loss Account

### Example Scenario:

Assume you availed PCFC for USD 100,000 when the exchange rate was INR 75/USD. So, PCFC availed in INR = INR 75,00,000.

When you receive payment against your export order:
- Assume you receive USD 100,000, but the exchange rate on that day is INR 74/USD. So, INR received = INR 74,00,000.

- **Exchange Gain/Loss:** The difference between INR 75,00,000 (PCFC availed) and INR 74,00,000 (INR received) results in an Exchange Loss of INR 1,00,000.

### Accounting Entries for Receipt of Payment:

- Debit: Bank Account (INR 74,00,000)
- Debit: Exchange Loss Account (INR 1,00,000)
- Credit: Packing Credit in Foreign Currency Account (PCFC Account) (INR 75,00,000)

### Conclusion:

Ensure that your accounting system accurately records the exchange rates used for availing PCFC and for converting foreign currency receipts into INR. Any difference due to exchange rate fluctuations should be recognized as Exchange Gain or Loss in your financial statements. This approach ensures compliance with accounting standards and provides a clear reflection of your financial position regarding export-related finances. If in doubt, consulting with a professional accountant or financial advisor familiar with foreign exchange transactions and export finance would be beneficial.

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