Letter of Credit(LC), PPT of LC

Details about LC and its Accounting treatment and General Accounting Practice of LC In Nepal.

1. Letter Of Credit(LC) Prepared by: Surya Prasad Neupane Email: [email protected] Mobile No.:[phone]

2. A letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount o f the purchase . Due to the nature of international dealings, including factors such as distance , differing laws in each country , and difficulty in knowing each party personally , the use of letters of credit has become a very important aspect of international trade. Definition

3. Mechanism of LC

4. Documents that may be request for LC Documents Commercial Document (Invoices, packing lists) Shipping Document Bill of lading  (ocean or multi-modal or charter party), airway bill, lorry/truck receipt, railway receipt ) Final documents (Bill of Exchange) Insurance Document insurance policy or certificate Official document  license, embassy legalization, origin certificate, inspection certificate

5. Parties in LC Transaction Beneficiary Applicant Issuing Bank/ Opening Bank Confirming bank Advising Bank/ Correspondence Bank Nominal/ Negotiating Bank Second Beneficiary Reimbursing Bank Parties Involved

6. Applicant Issuing bank/ Opening Bank It is the one which on the receipt of request from its customer, the applicants (purchaser’s) bank examines the proposal and open a LC in favor of the beneficiary with the stipulated terms and condition. Beneficiary The Beneficiary of LC if generally the seller of the goods and services or the person in whose favor the credit has been issued. The Buyer who finalizes the terms and condition of purchase transaction and submits a request to his bank for issuing a LC in favor of seller.

7. Advising Bank/ Correspondence Bank Reimbursing Bank Reimbursing bank is the bank authorized to honor the reimbursement claim in the settlement of negotiation/ acceptance/payment lodged with it by the negotiation bank. It is normally the bank with which issuing bank has an account from which payment has to be made. Confirming bank The Confirming Bank adds its guarantee to the credit opened by another bank, thereby undertaking the responsibility of payment/ negotiation acceptance under the credit, in addition to that of the issuing bank .( where the exporter is not satisfied with the undertaking of only Issuing Bank). In Case seller ( beneficiary ) resides in a different place or in a foreign country, the issuing bank may contact some other bank in the beneficiary’s country may agree to advise the credit to the beneficiary and thus play the role of an advising bank.

8. Nominated Bank/ Negotiating Bank: Second Beneficiary: The negotiating bank is the bank who negotiates the document submitted to them by the beneficiary under the credit either advised through them or restricted to them for negotiation . On the negotiation of the documents they will claim the reimbursement under the credit and makes payment to the beneficiary provided the documents submitted are in accordance with the terms and condition. He is the person who represent the first or original beneficiary of credit in his absence. In this case, this credits belonging to the original beneficiary is transferable. The rights of the transferee are subject to terms of transfer.

9. Actually these transactions look like

10. Accounting treatment of LC in respect of Buyer/ Applicant …….

11. Accounting Entry Made by Buyer/Applicant When LC is Issue LC Charge/LC Commission/ Bank Charge A/C……..DR. TO Bank A/C………………………………………CR. Cash Margin (made as per negotiation, Generally 10% Taken as margin) Cash Margin A/C ………………………………………DR. To Bank A/C……………………………………CR.

12. After received confirmation of Payment made to the Party/Beneficiary Party/ Beneficiary A/C………………..DR. To Bank A/C………………….CR. Cash Margin Released Bank A/C ……………………………………DR. To. Cash Margin A/C……………CR.

13. VAT ??????? Any Idea About How to made payment of VAT Amount ?????

14. By Issuing NRB Cheque (Custom Clearing) Custom Clearing( NRB Cheque) A/C …………….DR. To Bank A/C………………………………..CR. NRB Cheque is issued for payment for VAT amount but only 10%. And remaining amount of VAT and other duties are Paid through the Clearing Agent.

15. Drawback of LC ???????? Drawback of LC is that It assure correct document but not necessarily correct Goods.

16. Happy Weekend !!!!!!!