Letter of Credit is a binding document that a buyer can request from his bank in order to guarantee that the payment for goods will be transferred 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.
Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another; there are four types of letter of credit which are:
Letter of guarantee is a type of contract issued by a bank on behalf of a customer who has entered a contract to purchase goods from a supplier and promises to meet any financial obligations to the supplier in the event of default.
A bank guarantee and a letter of credit are similar in many ways but they're two different things. Letters of credit ensure that a transaction proceeds as planned, while bank guarantees reduce the loss if the transaction doesn't go as planned.
A letter of credit is an obligation taken on by a bank to make a payment once certain criteria are met. Once these terms are completed and confirmed, the bank will transfer the funds. This ensures the payment will be made as long as the services are performed.
A bank guarantee, like a line of credit, guarantees a sum of money to a beneficiary. Unlike a line of credit, the sum is only paid if the opposing party does not fulfill the stipulated obligations under the contract. This can be used to essentially insure a buyer or seller from loss or damage due to nonperformance by the other party in a contract.
There are main features in Letter of credit which help you to reach the ultimate purpose of generating the product’s final cost & P&L such as:
Supplier module: the module by which the company manages its relation with its suppliers & issues an invoice to verify the items reception in same time.
The Company suppliers can provide the LC with any services they need to also be added to the item’s cost sheet.
Cash & bank module: the module by which the company can handle expenses over each LC & manage the cash payment /receipt as expenses on the LC like; Transportation, Bank Charges, custom tax…etc and this also will be added to the item’s cost sheet.
Inventory control: the modules by which the company receives or packs its items to/from its warehouse to the LC like; clothes, materials…etc & these items or materials cost will be automatically calculated after closing the LC.
Fixed assets: the module in which the company can import or export assets through LC Like; cars…etc & these assets cost will be automatically calculated after closing the LC.
General Ledger module— all the above modules have a link with the general ledger module; so that, The journal entry of each transaction is posted to cover & manages the accounting part of the LC through previewing the company’s income statement, trial balances & compare it with the LC reports.
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