Letter of Credit

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Bharath Kumar (Querist)

27 December 2008 Pl clarify the following
If a banker gives CC Lt of Rs.4.0Cr and a LC facility for Rs.1.0Cr to his client.

How would this be accounted in the clients books.
Will Rs.5.0cr (CC+LC) shown as liability of the client.

For the CC limit the client would be paying interest, what would he be paying for LC
Will the banker open 2 accounts one for CC and another for LC for his client.

CA RAMESH KUMAR AHUJA

CA RAMESH KUMAR AHUJA (Expert)

27 December 2008 The CC limit and the LC limit are two different facilities given by the bank. CC limit is a funded facility which involves the flow of funds from the bank to the benefit of the borrower which is duly accounted for in the accounts and interest is payable on the agreed rate of interest.
On the other hand the LC limit is a non funded facility given by the banker. It is a sort of assurance given to the supplier of goods or services for making a payment. A note to that effect is given in the final accounts that a contingent liability is there to the extent of LC limit availed by the borrower. However, no accounting entry is passed till it is converted into an ascertained liability by invoking of the LC whereby the banker honors the LC and releases the payment.

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Bharath Kumar

Bharath Kumar (Querist)

27 December 2008 Thanks. Can you pls further clarify
What would the client pay to the bank for availing this facility? Under which account would the bank debit the charges on his client

CA RAMESH KUMAR AHUJA

CA RAMESH KUMAR AHUJA (Expert)

27 December 2008 The bank will charge LC service charges which may be recovered by debiting the other account like CA or CC maintained with the bank. These charges may be parked by the borrower under the head of Bank Charges in its accounts.

Bharath Kumar

Bharath Kumar (Querist)

27 December 2008 Thanks

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