Managing Letters of Credit for Export Purposes

This document explains how you manage letters of credit when selling goods to a foreign customer.

Usually it is the seller who requests that a letter of credit should be used as payment method.


An agreement is made with the supplier. A letter of credit is received, approved and registered. The goods are delivered and the letter of credit is reported as paid (with status 85 = Paid). It can be reviewed in 'Letter of Credit. Open' (RMS100).

For detailed information on how the system is affected, see Managing Trading Risk.

When a customer invoice is created based on the customer order in 'Customer Order. Open' (OIS100), the following account entries are created:

Accounting Rule Account Debit Credit
  Sales   x
  Accounts receivable x  
  Accounts receivable   x
OI20–105 Letter of credit not paid* x  

* The letter of credit number connected to the order is used as the invoice number for this account entry, not a number from the standard invoice number series.

When the customer payment is recorded in 'Payment Received. Record' (ARS110), the following account entries are created:

Accounting Rule Account Debit Credit
OI20–105 Letter of credit not paid   x
  Bank x  

Before You Start

See Managing Trading Risk.

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. Check Buyer's Credit Status

    Make a credit check to verify that the buyer is a reputable firm or individual.

  2. Enter into Agreement with Buyer

    Establish the acceptable form and terms for the transaction terms.

  3. Review Letter of Credit and Terms Stipulated

    Carefully review the letter of credit and supporting documentation that have been forwarded by the bank you use as the corresponding bank.

  4. Contact Buyer for Correction of Documents and Terms

    If any detail deviates from the original agreement or is incorrect, contact the buyer for correction.

  5. Prepare Goods Delivery and Requested Documents

    Arrange for the delivery of the goods and produce the necessary documents.

  6. Send Documents to Company Bank after Delivery

    Immediately after the goods have been placed on board the carrying vessel, send the documents to the corresponding bank.

  7. Record Payment Received

When the buyer's bank has sent the money to your corresponding bank, record the payment in 'Payment Received. Record' (ARS110). This automatically updates the status of the letter of credit to 81 = 'Paid not confirmed' or 85 = 'Paid, confirmed', depending on the type of letter of credit.

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