Lc retirement charges

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

17 May 2012
X & Co has opened an LC (Letter of Credit) in the maonth of march'12 which would expire on may'12.

Now should the co provide for LC retirement charges in the accounts for the year ended mar'12 or no provision is required since the LC retires in the nex t financial year.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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02 August 2024 For accounting purposes, the treatment of LC (Letter of Credit) retirement charges involves the following considerations:

### **Understanding LC Retirement Charges**

1. **LC Retirement Charges:** These are fees charged by the bank when the LC is retired, which means when the bank settles the payment against the LC documents. This often includes handling fees, commission, and other related charges.

2. **Accounting for LC Retirement Charges:** Since these charges pertain to a financial transaction that will occur after the end of the accounting period, they need to be handled according to the principles of accrual accounting and the matching concept.

### **When to Recognize LC Retirement Charges**

1. **Accrual Basis of Accounting:**
- **Recognition in Financial Statements:** Under the accrual basis of accounting, expenses should be recognized in the period in which they are incurred, not necessarily when they are paid. If the LC was opened and its charges are related to the period ending March 31, 2012, even if the retirement occurs after this date, you should recognize the expense in the financial year in which the LC was opened.

2. **Provisions for Expenses:**
- **Provision Required:** If the LC retirement charges are known or reasonably estimable at the end of the accounting period (March 31, 2012), a provision for these charges should be made in the accounts for the year ended March 31, 2012. This is in accordance with the principle of matching expenses with the revenues they help to generate.
- **Expense Recognition:** The provision ensures that the expense is matched with the revenue of the same period, providing a more accurate picture of the company's financial performance.

### **Example**

Assume the following:
- **LC Amount:** $100,000
- **LC Retirement Charges Estimated:** $500
- **LC Expiry Date:** May 2012
- **Financial Year End:** March 31, 2012

**Accounting Entries as of March 31, 2012:**

1. **Provision for LC Retirement Charges:**
- **Journal Entry:**
- **Debit:** LC Retirement Charges Expense $500
- **Credit:** Provision for LC Retirement Charges $500

2. **Actual Payment of LC Retirement Charges (after March 31, 2012):**
- **Journal Entry:**
- **Debit:** Provision for LC Retirement Charges $500
- **Credit:** Bank $500

### **Summary**

- **Provision Required:** Yes, you should provide for the LC retirement charges in the accounts for the financial year ended March 31, 2012, because the charges are related to the LC opened during that financial year.
- **Expense Matching:** This provision aligns with the accrual accounting principle, ensuring that the expenses are recognized in the correct accounting period.

By making the provision, you ensure that the financial statements reflect all known liabilities and expenses, providing a more accurate representation of the company's financial position.

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