Letter of Credit

Letter of Credit is basically a document that you would obtain from your banker and
deliver it to your supplier for the purchasse of goods as a security for the payment on due
date.

It can also be a document that you would receive from your customers for supply of
goods.

It is primarily a document issued by a banker so that the supplier of Goods is guaranteed

about the payment for the goods he has supplied.

So when you receive the Letter of Credit from your banker and there would be no
Accounting Entries except for the charges that your banker would charge you for the
issue of the Letter.

Then when you issue the Letter of Credit to your Supplier for Import of Goods, the
following entries would be passed i.e

Inventory Dr
Vendor Cr

In this situation also no accounting entries would be passed specific to Letter of Credit.
At the time of Payment your vendor's banker would approach your banker for payment
and not you for the Goods delivered.

Hence your banker would pay the amount on behalf of you to your supplier and then
intimate you. The amount so paid has to be entered in your books in the following way

Vendor Dr
Bank Cr

for clearing the open item in the Vendor account.

If you observe in the whole Business Process relating to Letter of Credit the monetary
movement is only at the time when the invoice is due for payment.

Hence we treat this as a Noted item i.e Only for Information, in SAP.
Letter of Credit for Exports is nothing but the reversal for Purchases.

In this case we receive a Letter of Credit from our Customer.

Once we receive the Letter of Credit from Our Customer, we deliver the Goods to him.In
that event the following accounting entries are passed:-

Customer Dr
Sales Cr

On the due date our banker would forward the Letter of Credit to our customer banker
and collect the amount on our behalf and credit the amount in our account. In that
situation the following entries are passed

Bank Dr
Customer Cr (clearing the open items)

The entries stated above are similar to those passed in SAP also.

In SAP
1.At the time of Exports

Dr Customer
Cr Sales

2.Receipt of LC

T Code F-49

Enter the LC as Noted Item as it no financial implication.

3. Receipt of Money from Customer

T Code F-28

Enter Spl Gl Indicator L in the Open Itme Selection segment , this will clear the
Open item in the LOC GL account.

Same is the process for Bank Gaurantee also.