Details about LC and its Accounting treatment and General Accounting Practice of LC In Nepal.

1. Prepared by: Surya Prasad Neupane
Email: suryaneupane12@gmail.com
Mobile No.:+977-9851190541

2.  A letter of credit is a letter from a bank
guaranteeing that a buyer's payment to a seller
will be received on time and for the correct
amount. In the event that the buyer is unable to
make payment on the purchase, the bank will be
required to cover the full or remaining amount of
the purchase. Due to the nature of international
dealings, including factors such as distance,
differing laws in each country, and difficulty in
knowing each party personally, the use of letters
of credit has become a very important aspect of
international trade.

4. Mechanism of LC

5. Documents
Commercial
Document
(Invoices, packing
lists)
Shipping Document
Bill of lading (ocean or
multi-modal or charter
party), airway bill,
lorry/truck receipt, railway
receipt)
Final documents
(Bill of Exchange)
Insurance
Document
insurance
policy or
certificate
Official document
license, embassy
legalization, origin
certificate, inspection
certificate

6. Parties in LC Transaction
Benefic
iary
Applica
nt
Issuing
Bank/
Openin
g Bank
Confir
ming
bank
Advising
Bank/
Correspo
ndence
Bank
Nomin
al/
Negoti
ating
Bank
Second
Benefic
iary
Reimb
ursing
Bank
Parties
Involved

7. Applicant
Issuing bank/
Opening Bank
It is the one which on
the receipt of request
from its customer, the
applicants
(purchaser’s) bank
examines the proposal
and open a LC in favor
of the beneficiary with
the stipulated terms
and condition.
Beneficiary
The Beneficiary of
LC if generally the
seller of the goods
and services or the
person in whose
favor the credit has
been issued.
The Buyer who
finalizes the terms
and condition of
purchase
transaction and
submits a request to
his bank for issuing
a LC in favor of
seller.

8. Advising Bank/
Correspondence
Bank
Reimbursing Bank
Reimbursing bank is the
bank authorized to
honor the
reimbursement claim in
the settlement of
negotiation/
acceptance/payment
lodged with it by the
negotiation bank. It is
normally the bank with
which issuing bank has
an account from which
payment has to be made.
Confirming bank
The Confirming Bank adds
its guarantee to the credit
opened by another bank,
thereby undertaking the
responsibility of payment/
negotiation acceptance
under the credit, in
addition to that of the
issuing bank.( where the
exporter is not satisfied
with the undertaking of
only Issuing Bank).
In Case seller (
beneficiary ) resides
in a different place or
in a foreign country,
the issuing bank may
contact some other
bank in the
beneficiary’s country
may agree to advise
the credit to the
beneficiary and thus
play the role of an
advising bank.

9. Nominated
Bank/
Negotiating
Bank:
Second
Beneficiary:
The negotiating bank is the bank who
negotiates the document submitted to them
by the beneficiary under the credit either
advised through them or restricted to them
for negotiation . On the negotiation of the
documents they will claim the
reimbursement under the credit and makes
payment to the beneficiary provided the
documents submitted are in accordance with
the terms and condition.
He is the person who represent
the first or original beneficiary
of credit in his absence. In this
case, this credits belonging to
the original beneficiary is
transferable. The rights of the
transferee are subject to terms
of transfer.

12. LC Charge/LC Commission/ Bank Charge A/C……..DR.
TO Bank A/C………………………………………CR.
(made as per negotiation, Generally 10% Taken as margin)
Cash Margin A/C ………………………………………DR.
To Bank A/C……………………………………CR.

13. Party/ Beneficiary A/C………………..DR.
To Bank A/C………………….CR.
Bank A/C ……………………………………DR.
To. Cash Margin A/C……………CR.

14. Any Idea About
How to made
payment of VAT
Amount ?????

15. (Custom Clearing)
Custom Clearing( NRB Cheque) A/C …………….DR.
To Bank A/C………………………………..CR.
NRB Cheque is issued for payment for VAT amount but only
10%. And remaining amount of VAT and other duties are Paid
through the Clearing Agent.

16. Drawback of LC ????????

19. Happy Weekend !!!!!!!