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What is a Letter of Credit?

praveen (Chartered Accountant) (6971 Points)

20 April 2010

Please explain me what is letter of credit and what is the responsibility of the auditor if there is a LC in the accounts of the assessee under income tax act

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praveen (Chartered Accountant) (6971 Points)
Replied 20 April 2010

Buyer (India) enters into a contract for sale of 1000 kgs of a product X with a seller (China)
Buyer’s Bank provides a Letter of Credit to the Seller
Seller moves the goods to the carrier (Ship) and gets a Bill of Lading
Seller exchanges the Bill of Lading with the Seller’s Bank in exchange for money
Seller Bank will make payment to the Seller
The Seller Bank will approach the Buyer Bank for money showing the Bill of Lading
The Buyer Bank will make the payment to the seller bank
The Buyer Bank will now exchange the Bill of Lading with the Buyer and gets the payment.
Buyer will exchange the Bill of Lading with the ship and takes delivery of goods.

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Ratan Deep Saxena (Asstt Manager (Accounts & Finance)) (2998 Points)
Replied 20 April 2010

Letter of credit

A binding document that a buyer can request from his bank in order to guarantee that the payment for goods will be tranferred to the seller. Basically, a letter of credit gives the seller reassurance that he will receive the payment for the goods. In order for the payment to occur, the seller has to present the bank with the necessary shipping documents confirming the shipment of goods within a given time frame. It is often used in international trade to eliminate risks such as unfamiliarity with the foreign country, customs, or political instability.

regards,

ratan

manikandan.J (Accounts Manager) (363 Points)
Replied 20 April 2010

letter credit open the A/c through bank is purpose for payment of Import goods buyer behalf of pay the amount bank, DP, DA it called Documents against payment called DP, Documents Against Acceptance Called DA etc.. formalities and instruction given by RBI you should follow the same