Accounting entries for LC

not necessary as actual liability is recorded

In both the situations no accounting entries needed in the books of importer.

Case (a)  : LC established by XYZ Ltd. In this case "Assurance of payment " is given by the banker on behalf of  XYZ Ltd to the supplier . Upto the point of purchase/import transaction takeplace,there is no entry needed in the books of accounts of XYZ ltd,except the accounting of " margin" if any provided by  XYZ ltd to the banker.    And as it is not at all a liability ,not a contingent liability also.

Case (b)  : In this case, LC is established by XYZ Ltd, and imported material received for processing.Usual entries for purchase only needed,that is debiting "Purchase" account and crediting "Supplier" account.In this case the actual liability is accounted in the books and credit usance period is available for 90 days.

On the expiry of  90 days, if XYZ ltd not making the payment to the supplier,the banker will make the payment and debit his customer"XYZ LTD".In this case  the liabilty of XYZ Ltd to the supplier is transfered to the banker. The banker will recover the amount  either from the deposit amount or it will be treated as loan to XYZ Ltd.

sir

i want to learn abour indian letter of credit

Thanks

vivek kumar

plz provide entries from buyer point of view

LC does not impact or trigger any accounting entries.The buyer can face one problem if you open a LC & you have not received the goods but if the seller collects cash based on documents of lC you will then need to pass the below entry.

1.Goods in transit account    .....            10LAKHS

2.To Bank                                 ---                            10lakhs

( The Main point is before you open the LC you need to ensure the seller provides inspection certificate,ships goods with a approved carrier,the pronote or bill of exchange to the LC should be pre endorsed by the buyer all those precautions should be taken0.

At same time if i am the seller i will demand from the buyer to open LC on certain bank accounts which has some repute nationally/internationally,it is wise for first few transactions to ask for payable on presentation bill of exchange.....even if a LC is opened by a known reputed bank....it is always better to get the LC advised with your banker as you may not know if the LC is fudged also.

When you deal with foreign Banks you should have a clause that if there is any discrepancy in the documents .....the certrificate from buyer to waive discrepancy if produced along with all documents presented then no Bank charges will be charged by the foreign banks.

If the buyer wants funding of cheap credit through LC like the average rate of his short term borrowing is 16%,but if he gives LC his costs comes to 11% he will demand for a usance ( 60-90-120-180day) draft on LC.If you are a seller & gives the credit ...you should be in a position to discount that LC & raise cash at cheap rates.When you discount LC you should negotiate with your bankers that they will not reduce your working capital limits also & your bank is solid which works with low cost of funding.Which is why in India ideally you should go to investor relations website of all 10 major banks & see whoever has lowest cost of funding he should be your preferred banker.

Hope this is helpful to you.

excellent replies by the members on the subject, as still lots and lots of confusions going on in the minds of accountants, on LC`s and accounting of the same.