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What is LC

Suppose Company wants to purchase goods on credit from a Foreign Party Alex Ltd,USA

Alex Ltd may not trust the company and refuse to give goods on credit.

In this case,Company can take LC (letter of Credit) from his Bank against some security like property

Thus Alex become secure that in case company does not pay,he will get money from Company''s Bank

 

Entry for LC (Letter of Credit)

Company imported goods worth $100000 from Al Qatar,UAE (Exchange Rate Rs 60/$)

Payment was secured against LC taken from ICICI Bank for 3 months

Bank took 2% Commission to secure the LC

As a security, Bank took Margin in form of FD at 10%

After 3 months, LC was revoked and payment made to party

Pass Entries

 

 

Note:-

LC can be for both Imported and Domestic purchases

For Imported purchases,it is called FLC

For local purchases,it is called ILC

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Commission charges on letter of credit :

Commission charges  A/c  Dr  30000

   To     Bank A/c    30000

 

10% Margin money in the form of FD :

8% FD  A/c  Dr  600000

  To     Bank A/c    600000

 

Interest Earned on FD:

8% FD   A/c  Dr   12000

  To     Interest Income  A/c  12000

 

At the time letter of credit was revoked and FD was matured:

Bank A/c  Dr   612000

  To   8% FD  A/c 612000

 

Assumed interest on FD is 8%

        

Points to Remember:

  • No entry is passed for issue of a letter of credit.
  • Letter of credit is a contingent liability, hence shown in notes to accounts in financial statements.

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  1. Accounts and Finance
  2. Step 2 Passing Routine Entries
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About the Author

CA Maninder Singh's photo - Expert in Practical Accounts, Taxation and Efiling
CA Maninder Singh
CA Maninder Singh is a Chartered Accountant for the past 7 years. He provides courses for Practical Accounts, Taxation and Efiling at teachoo.com .
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