If a business is exporting goods, then it is sensible to obtain some form of payment guarantee before the goods are shipped.
A letter of credit is a document which a buyer arranges with its bank. If the buyer does not pay, then the letter of credit places on obligation on the bank which issued it to pay the seller.
What is the Letter of Credit Accounting Procedure?
- Buyer and seller agree contract with payment guaranteed by letter of credit
- Buyers bank issues a letter of credit to seller
- Seller sends goods to carrier in exchange for shipping documents
- Seller sends shipping documents to sellers bank
- Sellers bank sends shipping documents to buyers bank
- Buyers bank sends payment to sellers bank who pays seller/li>
- Buyers bank sends shipping documents to buyer in return for payment/li>
- Buyers uses shipping documents to get goods from carrier
For further information on letter of credit accounting see the Wikipedia definition.
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.