How do you book a letter of credit in your books?

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vijay.rathinavel  

  • Member Since Mar-2010 | Mar 10th, 2010


The Money Behind a Letter of Credit.
A bank promises to pay on behalf of a customer, but where does the money come from? The bank will only issue a letter of credit if they know the buyer will pay. Some buyers have to deposit (or already have) enough money to cover the letter of credit, and some customers use a line of credit with the bank. Sellers must trust that the bank issuing the letter of credit is legitimate.

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A letter of credit is a promise to pay. Banks issue letters of credit as a way to ensure sellers that they will get paid as long as they do what they've agreed to do.

Letters of credit are common in international trade because the bank acts as an uninterested party between buyer and seller. For example, importers and exporters might use letters of credit to protect themselves. In addition, communication can be difficult across thousands of miles and different time zones. A letter of credit spells out the details so that everybody's on the same page.

The Money Behind a Letter of Credit.
A bank promises to pay on behalf of a customer, but where does the money come from? The bank will only issue a letter of credit if they know the buyer will pay. Some buyers have to deposit (or already have) enough money to cover the letter of credit, and some customers use a line of credit with the bank. Sellers must trust that the bank issuing the letter of credit is legitimate.

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Sandeep Sahu

  • Nov 9th, 2011
 

A letters of credit is a contingent liability of a particular bank and a contingent liability is shown as foot note of the balance sheet

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