Letter of Credit:

Letter of Credit is a credit letter from bank assuring of a buyer payment to a seller. Buyer payment to a seller will be clear on time in specified currency with specified amount subject to fulfill defined conditions of letter of credit.

Journal Entries:-

(1) Entry for opening of LC

L.C. Margin A/c Dr.
To Bank A/c
(Being ..% margin part to bank against LC of Rs. …………)

(2) Payment of Commission/LC Charges

L.C. Charges /Commission A/c Dr.
To Bank A/c
(Being LC Commission and Charges Paid against LC No. ….of Rs. .)

(3) Purchase of Goods

Purchase A/c Dr.
To Party (Creditor) A/c
(Being goods purchased against letter of LC No. ….)

(4) Entry for realization of LC

Party (Creditor) A/c Dr.
To Letter of credit A/c
(Being LC forwarded to buyer’s LC No. …..)

(5) Payment of LC

Letter of Credit Dr
To LC Margin A/c
To Bank A/c

(6) In Case of devolvement of LC

Letter of Credit Devolved A/c
To Letter of Credit
To L C Margin A/c
(Being LC no .. of Rs. devolved and margin adjusted by bank)