Lc discounting - accounting entry

Dear Vineet,

To Record Bill/LC Discounting, In Books Of Account, You Must Impliment One System Called BD Party A/c It Will Comes Under Current Liabilities,

1. When You Discounted LC The Actual Payment You Have'nt Received.

2.Still You Have To Receive The Money From Party And You Have Liability With Bank.

Please Follow Below Entries...

When Bill/LC Discounting

Bank A/c        Dr 95

Bank Charges Dr   5

Interest On LC Discounting Dr  ??(You Havent Mentioned It)

To BD Party              Cr 100

Being LC No... Discounted Due Date ...

When Actual Payment Receive

BD Party A/c Dr.  100

Bank Charges Dr.

To Bank A/c Cr.

To Party A/c  Cr.100

Thank And Regards

CReating BD party account will create more complications, while finalising your account, by year end. the LC bill discounting concept is nothing but an arrangement /benefit to a seller to avail the money thro bank for cash flow only. So, you can credit the buyer account , when your LC bills got discounted, with sufficient interest/charges , in a way that, your Sundry debtors account will project right picture always. If required, you can create, the buyer A/C with suffix- LC , and all those LC bills can  be debited here and the corresponding LC discounted credits can be posted in this ledger. It is very rare occasions, that LC discounted credits, will be revereted by the banks, unless otherwise, if the Bill of Exchange rejected by the issuing bank.

Yes, Mr. Chandra Sekar is right. The beneficiary bank will be discounted only after the verification and approval from the applicant banks with the submitted BOE, so there will be no chance for rejection in the future after discounting.

Bank A/c Dr.95

Bank Charges A/c Dr.5

Vendor A/C Cr.100

Please Note: if the beneficiary has any idea to discount the LC, kindly make sure that LC should by negotiation or by acceptance and also cross-check with the beneficiary bank about the applicant's bank LC can be discounted because some banks won't discount the other bank's LC.

I have some fundamental disconnect here (although my knowledge is limited to only discounting of LC for my organization). To my mind, the LC is discounted with the explicit approval of LC Issuing/Confirming Bank. Upon discounting, the Issuing/Confirming bank takes upon the obligation of paying the LC amount to the discounting bank, instead of the seller, upon maturity of the said LC. This is largely without recourse to the seller and the LC Disounting bank takes an exposure on the LC Issuing/Confirming bank. That is why, the LC discounting bank does only the KYC and seldom does credit underwriting of the seller. Also, that is why, most discounting banks do not accept LC from cooperative banks due to their weak credit. Hence, to my mind the AR in the Discounting Bank books should be standing against the Issuing/Confirming Bank and not the seller. If there are accounting policies on this, pls share the same as well.