Managing Letters of Credit for Import Purposes

This document explains how to manage letters of credit when buying goods from a foreign supplier.

Letters of credit as payment method are usually requested by the seller. However, in certain situations the buyer can prefer to use letters of credit as well. See Using Letters of Credit for International Payments – Overview.

Outcome

An agreement is made with the supplier. A letter of credit is created with supporting documentation, based on the terms of the agreement (The letter of credit has status 85 = Paid. The status of the purchase order is 85 = 'Invoice reporting complete'.). Goods are bought and paid for and the letter of credit is reported as paid. It can be reviewed in 'Letter of Credit. Open' (RMS100).

For the list of updated files, see Managing Trading Risk.

When the supplier invoice is entered in 'Supplier Invoice. Record' (APS100), the following account entries are created:

Accounting Rule Account Debit Credit
AP10–200 Accounts payable   x
  Purchase x  
AP10–205 Letter of credit not paid   x
  Accounts payable x  

When the supplier invoice is reported as paid in 'Supplier Payment. Enter Manual' (APS120), the following account entries are created:

Accounting Rule Account Debit Credit
  Bank   x
AP10–205 Letter of credit not paid x  

Before You Start

Follow These Steps

This is a typical flow when using letters of credit. However, there are variations, depending on the type of letter of credit, terms and organization.

  1. Enter into An Agreement with the Foreign Supplier

    Negotiate with the seller about the acceptable form and terms for the purchase.

  2. Register A Preliminary Letter of Credit and Connect it to Purchase Order(s)

    When the agreement is ready, register the letter of credit and connect it to one or several purchase orders. You do this in 'Letter of Credit. Open' (RMS100).

  3. Request Company's Bank to Open a Letter of Credit

    Print a request for opening a letter of credit and send it to the bank together with the pertaining documentation as stated in the application. You print the request in (RMS100).

    This step is managed in M3 by changing the status of the letter of credit.

  4. Report That the Letter of Credit Is Sent to the Seller's Bank

    Report that your bank has opened the letter of credit and sent it to the corresponding bank (usually the seller's bank), together with supporting documentation and instructions. You do this in (RMS100).

    This step is managed in M3 by changing the status of the letter of credit.

  5. Report the Approved and Returned Letter of Credit

    Report that the seller and the seller's bank have approved the letter of credit and the supporting documentation when the company's bank returns the documents to you. You do this in (RMS100).

    This step is managed in M3 by changing the status of the letter of credit.

  6. Enter the Supplier Invoice and Match It to the Purchase Order

    Enter the invoice from the seller in 'Supplier Invoice. Record' (APS100). By matching it to the purchase order previously connected to the letter of credit the connection with the letter of credit and the invoice is established. This generates the first financial transactions in this process.

  7. Report That Payment Is Made to the Seller's Bank

    Report that the goods are delivered and that the company's bank has sent the payment to the seller's bank. You do this by defining the invoice as paid in 'Supplier Payment. Enter Manual' (APS120). This automatically defines the letter of credit as paid.

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