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Letter of Credit Journal Entries (student needs help)

Hi all !

I searched google a lot but found mixed journal entries for Letter of Credit in the buyer's (importer's) books.

However, I will reiterate here what I found:

(1) When bank issues L/C:

L/C Margin...Dr. ------------------------>(Is this an asset account ??)

Bank Account...Cr

(2) When L/C is realised, the bank charges its commission:

L/C Commission/Charges...Dr

Inventory...Dr.

Supplier...Cr.

Bank...Cr.

L/C Margin..Cr.

Are the above journal entries correct ? And/or are there more journal entries than these ?

I would really appreciate your help in this regard.

Thank you

Replies

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You should answer these questions by thinking through the economic effect of the transactions that are to be accounted for and then designing your accounting entries to reflect those effects.  If you try and skip the thinking and understanding stage and go straight to someone else's answer you are doing yourself a disservice.

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By Shawn
27th Jan 2014 14:43

No reply

Since I didn't receive any reply from you for correct journal entries, should I assume that I am doing disservice to myself by even posting questions here, where some of experienced accountants like yourself are only replying with their own philosophy rather than the answer to the question.

 

Please do not insult someone else's intelligence (even though its limited in terms of accounting) by posting such comments as you have posted.

 

 

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By Shawn
24th Jan 2014 10:03

Economic Effect Wise Journal Entries

Hi John !

Thanks for your reply. I thought so to, but now here I will post J/Es from 2 sources, which I found on google:

SOURCE 1

(1) When Buyer opens LC with its bank

Dr. Supplier Account (Accounts Payable)

Cr. Bank LC Establishment (or Bills Payable)

(2) When the bank has earmarked LC Margin

Dr. Cash Margin held on LC (asset)

Cr. Bank Account

(3) When Buyer accepts LC liability (when the goods have reached buyer's port and bank has informed buyer of arrival advice)

Dr. Bank LC Establishment (or Bills Payable)

Cr. Bank LC Acceptance

(4) Amount settled/paid to party

Dr. Bank LC Acceptance

Cr.Bank Account

(6) Inventory received

Dr. Inventory

Cr. Supplier Account (Accounts Payable)

(5) LC Commission charged by bank

Dr. LC Commission (Expenses)

Cr. Bank Account

 

The net effect of above is:

Dr. Inventory

Cr. Bank Account

(purchase of inventory)

 

and 

Dr. LC Commission (Expenses)

Cr. Bank Account

(LC commission charged by bank) SOURCE 2(1)  Dr. LC MarginCr. Bank Account (2) Dr.InventoryCr.Supplier (3) Dr. LC CommissionCr. Bank  (4) Dr. Bank LC Commission (5)  Dr. SupplierCr. LC Margin  I would be grateful if you tell me which of these is correct and/or are there any wrong entries ? Thank you Profound Regards,Shawn            

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27th Jan 2014 14:59

Not just a philosophy

The reason you need to be able to think these things through yourself is there are times when you will need to be able to do so. You will not have access to either here or Google in exams. If you don't understand why a particular transaction leads to certain journal entries, you won't be able to answer exam questions on the subject.

In saying, "I found these on Google, are they correct?" you are insulting your own intelligence. You could have tried to work them out for yourself and posted what you thought was correct. You could even have covered your understanding of the journals you had searched out. Either of these would have shown you'd at least tried to apply your brain to the problem. Posting someone else's journals and then simply asking if they are correct implies you cannot be bothered to use your brain at all.

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By Shawn
27th Jan 2014 15:10

Again

Yes, true, I found them on google as I was searching for them because I need to incorporate those in financial accounts. I am a recently qualified accountant, who got job in a company right after qualifying, still not professional and still I am a student as I am learning. I haven't even seen the treatment in my study texts.

Posting google results here because even those who had posted those entries have not fully explained the subject.

 

I posted results here to seek help. 

 

I didn't know such non-sense from respected members have to be seen.

 

 

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27th Jan 2014 16:10

Show your workings

All you have posted here is other people's work. If you want to be taken seriously then show some work of your own. It is hard to take you seriously as someone who claims to have actually qualified if you can't at least post some thoughts on the journal entries you have simply copied and pasted. This goes double when you couldn't even be bothered to format source 2 in a sensible way, or provide links (so reliability can be gauged) for either source.

If something had to specifically appear in your study texts for you to understand it, you are going to struggle in the real world of accountancy. Real-life accountancy is rarely as neat as it is in books, but if you grasped the principles behind study text examples properly then you can handle it. It sounds more like you learned by rote and are now paying the price for that.

It is one thing to post a query that you have worked on but still cannot resolve. It is quite another to just post the result of a quick Google search and apparently expect all the thinking to be done by others. If you want proper responses, do some of the ground-work yourself instead of simply insulting those who refuse to spoon-feed you answers.

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By Kirkers
27th Jan 2014 16:34

Just a word of advice. I am also a student, although I'm not yet qualified.

I post on this forum regularly, and people here were very helpful when it came to some study questions I had. I do a correspondence course and therefore have no lecturers to consult, just my text books and when I'm stuck on something the posters here kindly take the time of out their day to sit and help me understand.

That being said, I always explain what I'm stuck on, what I think the answer should be and why I've come to that conclusion. It is the same as copying someone's homework all through school without giving any thought to why the answer is what it is, and expecting to pass your GCSE's at the end of it.

I've worked in practice for a few years and the scenarios you come across everyday are so dissimilar to the scenarios in my text books that without the basic understanding I wouldn't get by day to day.

If you expect (or hope) that people on here will give you free answers to your own study you at least need to show them that you're worth the effort of explaining to. Even a quick "I think the answer is (b) because..." and if it's the wrong answer perhaps "can anyone point me to the HMRC manual regarding this/can you explain why my answer was incorrect, so I don't make the same mistake again."

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By Shawn
28th Jan 2014 15:50

There is no treatment anywhere for LC transactions. What do you think I have a limitless brain ? Certainly not. Don't I know I have to do my own research ? 

 

The posters I found so far are mostly rude. There are times when you can't go beyond a certain thinking, so did I.

 

Yes, I had no lectures too. Just did past papers and sat exams.

 

 

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By Kirkers
28th Jan 2014 16:00

.

Shawn wrote:

There is no treatment anywhere for LC transactions. What do you think I have a limitless brain ? Certainly not. Don't I know I have to do my own research ? 

 

The posters I found so far are mostly rude. There are times when you can't go beyond a certain thinking, so did I.

 

Yes, I had no lectures too. Just did past papers and sat exams.

 

 

You'll see I didn't say 'no lectures' but 'no lecturers.' As in, teachers. Therefore when I struggled understanding something I asked on here if anyone could elaborate.

It's all very well asking sarcastic and rhetorical questions in response, but your opening post demonstrates nothing about doing your own research.

Instead, it looks like you've simply copied and pasted something and want someone to tell you the answer.

You can't expect people to 'assume' you've done your own research when you mention nothing to that effect, especially since the majority of people that write posts similar to yours are after quick and easy answers to their homework.

 

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28th Jan 2014 16:05

What research?

You have done a basic Google search and just posted the results. To call that research is a bit of a stretch.

As for saying "There is no treatment anywhere for LC transactions", this just reinforces my view that you have learned by rote. Whilst you may not have come across letters of credit specifically in your studies, you should be able to work out their intended accounting effect. As the specific item is new to you, you may not be 100% sure of your interpretation and want to check it. That is a different query to "I've googled this and here are the first couple of results.Tell me if they are right." which is what you have done.

If, like Kirkers, you want to show that you have at least thought about this then you might get an answer. You don't need to have a limitless brain, just show some indication that you have applied any sort of brain-power at all will do, even if you misunderstand completely. If you just want to post the results of a lazy search and then bitch about people who object to being asked to do your thinking for you, you're out of luck.

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By Kirkers
28th Jan 2014 16:21

Well aren't you just a lovely

I see his comment has been deleted.

What lovely language.

 

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By Sahadat
10th Nov 2015 08:57

A to Z LC posting

Didn't refer complete LC posting from A to ZA

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29th Mar 2016 12:40

No Claim against Export Value

What Should be the accounting treatment for the transaction mentioned below :                                     Quantity-640 Prs         Unit Price-$9.350        Amount-  $5984.00                                         Less : 1% No Claim :                                                        $59.84                                                  Total                                                                         $5924.16                              Accounting treatment against Trade Debtors , Sales and Exp.????                  

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By Gamini
29th May 2016 17:20

Hi, Reg. Item No 2 of your post; When the LC is realized and Material is being received, why the supplier's A/C should be Credited while the LC Margin A/c also is being credited simultaneously?

When the LC is realized and Material is being received, following accounting treatment could be applied.
1. L/C Commission Dr.
Inventory (value of Material) Dr.
Bank (with Commission) Cr.
Supplier (value of Material) Cr.

2. Supplier (value of Material) Dr.
LC Margin A/c (Value paid) Cr.

Regards.

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