Letter of Credit

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 purchase 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 DrVendor 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 DrBank 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 DrSales 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 DrCustomer Cr (clearing the open items)

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

In SAP1.At the time of Exports

Dr CustomerCr 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 Item Selection segment , this will clear the Open item in the LOC GL account.

Similar is the case for Bank Guarantee also.

Bank Guarantee = letter of Guarantee Bank Guarantee is a Non Fund based transaction. It has no impact on the books of Accounts.

It is a sort of Guarantee that a Purchaser gives to a Seller, for the purchase of Goods.

It is a Letter issued by the Banker of the Purchaser to the Seller.

As it has to impact on the financial transactions we need to treat it is SAP as Noted Item. The configuration required is to be done using T code FBKP i.e. Special GL Indicator.

When the payment is made to the seller the bank guarantee is received back from the seller and the open item in the particular GL account would be cleared.

Actually, BG given are required to be shown as notes to accounts. There should not be any accounting entry in books.

SAP records BG through statistical posting or through noted items. In noted items no entry is passed. But this may create some problem while clearing. So its better to use statistical posting through F-38.

By using clearing account, we nullify the entry. Hence there is no effect in books which is right.

Once the BG is over, you have to expire the BG. So the next step is F-19. This will reverse statistical entry.

Steps in BG:

Create special GL indicator for BG: FBKP

create reconciliation GL account for BG (FS00) and assign the same in T code FBKP

Create BG: F-38

Customer A/c-DrBG Clearing A/c-Cr

Enter BG Charges : F-02When you will give bank guarantee, bank will charge some charges. So you will have to bear it and you will have to pass entries.

Extension of BG (Document Change), if any: FB02As regards extension, it is possible that the customer may want to extend the expiry date of bank guarantee. So you may have to change the due date.

You can change a guarantee by changing the document or the line items in the customer account, the vendor account, or the reconciliation account.

When changing line items however, you must select With special G/L transactions on the Change Vendor Line Items: Initial Screen otherwise the guarantees you wish to change will not be selected.

Viewing open BG: FBL5N

Expiring BG: F-19

BG will get expired once the contract is performed. So it needs to be closed. So BG needs to be expired.