What is Letter of Credit & How to get it financed?

Now finally we have to do accounting part for LC processed:

The accounting process for an LC transaction involves several steps:

1. Record the LC transaction: The first step is to record the LC transaction in the books of accounts. This involves recording the amount of the LC as a liability in the books of the importer and as an asset in the books of the exporter.
2. Record bank charges: Banks charge fees for processing LC transactions. These charges should be recorded as an expense in the books of the importer and as income in the books of the exporter.
3. Record exchange rate differences: If the LC is issued in a currency other than the local currency, exchange rate differences may arise. These differences should be recorded in the books of both parties, as appropriate.
4. Record payment: When payment is made under the LC, the liability recorded in the books of the importer and the asset recorded in the books of the exporter should be reduced accordingly.
5. Record interest expense: If the LC is financed by a bank, the interest expense incurred should be recorded in the books of the importer.
6. Record financing fees: Banks may charge fees for financing an LC transaction. These fees should be recorded as an expense in the books of the importer.
7. Record repayment: When the beneficiary repays the financing bank, the liability recorded in the books of the beneficiary should be reduced accordingly.
8. Journal Entries:
   
   When a supplier receives a letter of credit (LC) from a buyer, the supplier must book the LC liability on their books until the LC is paid.
   
   Here is a general example of a journal entry for a supplier booking an LC liability:
   
   Debit: Bank account (for any fees paid to the bank to process the LC)
   Credit: Bank fees expense account
   
   Debit: LC receivable account (for the amount of the LC)
   Credit: Sales revenue account (for the amount of the sale)
   
   Debit: LC liability account (for the amount of the LC)
   Credit: Inventory or cost of goods sold account (depending on the nature of the transaction)
   
   Here is a general example of a journal entry for the receiver of payment related to an LC:
   
   Debit: Bank account (for the amount received)
   Credit: LC receivable account (for the amount of the LC)
   
   Debit: Exchange rate gain account (if the payment was received in a foreign currency and the exchange rate increased)
   Credit: Bank account (for the amount of the exchange rate gain)
   
   Note that the exact account names may vary depending on the specific accounting system used by the business, and the specific terms of the LC transaction. It is important to consult with an accountant to ensure that the proper accounts are used for LC transactions.

The exact accounting treatment for an LC transaction may vary depending on the specific terms of the LC and the applicable accounting standards. It is important for businesses to consult with their accountants to ensure that they are properly recording and reporting their LC transactions.