Process a letter of credit

• 10 minutes

This unit explains how to process a letter of credit after the configuration is in place.

Create a purchase order and enter the letter of credit details

A letter of credit is associated with a purchase order to process vendor transactions with minimal manual intervention. The involved parties are the buyer (applicant), the seller (beneficiary), the issuing bank (buyer’s bank), and the advising bank (beneficiary’s bank).

When a company is both the buyer and applicant for the letter of credit, the letter of credit is named an import letter of credit. Purchase orders that are associated with letters of credit are not considered for summary invoicing.

1. Select Procurement and sourcing > Purchase orders > All purchase orders.

2. Select New to create a new purchase order.

3. In the Create purchase order page, select the vendor account in the Vendor account field.

4. Expand the General FastTab and on the Bank document type field, select Letter of credit, and then select OK.

   

5. Go to Cash and bank management > Letters of credit > Import letter of credit and import collection to view the letters of credit.

6. You can double-click the order number that is associated with the letter of credit to be updated. Alternatively, in the Purchase order page, select the Manage tab, and then select Letter of credit/import collection.

   

7. Select the General FastTab, and in the Bank account field, select the bank that assigns the letter of credit. In the Bank document number field, enter the document number that is specified by the bank.

8. Select the Lines FastTab, and then select Add line to add shipment details. Enter the necessary values in the Amount, Expected maturity date, Actual maturity date, and Document status fields.

9. Select Fetch purchase order shipments to view the shipment details that are already specified in the purchase order lines or delivery schedule.

10. Select Shipment margin transactions to open the Shipment margin page to view the shipment margin transactions for the selected shipment.

11. Optional: Select the Bank document FastTab, and then specify details in the Documentary credit type, Documentary credit nature, and Expiration date fields.

12. A letter of credit can be either Irrevocable or Revocable. It can be Nontransferable, Transferable, or Revolving in nature.

13. Optional: Select the Bank details FastTab, and then enter the advising bank details in the Advising bank and Date of issue fields.

14. Optional: Select the Terms FastTab, and then specify the shipment terms and payment terms for the letter of credit.

15. Optional: Select the Insurance FastTab to specify details of the insurance request that was submitted by the vendor in the Insurance status, Insurance vendor number, and Insurance number fields.

16. Select Process > Confirm to confirm the letter of credit.

17. The Facility balance field is updated based on the value in the LC / IC Amount field.

18. The Amount used field in the Bank facility agreement details page is updated with the letter of credit amount.

19. The letter of credit details are confirmed only if the line amounts total equals the LC / IC Amount and it does not exceed the amount available for the facility type.

20. Select Print application to print the letter of credit application page to be submitted to the bank.

Amend the letter of credit details

If the purchase order details change, you need to update the letter of credit details before you completely invoice the purchase order. You can modify a confirmed letter of credit only when the letter of credit has a Confirmed status. The bank might charge a fee for amending an existing letter of credit.

1. Select Cash and bank management > Letters of credit > Import letter of credit and import collection.
2. Double-click the import letter of credit or import collection to be amended.
3. Select Process > Amend, and then amend the letter of credit details.
4. You can change the letter of credit amount or number of shipments, if required.
5. Select Confirm to confirm the changes made to the letter of credit.
6. Select Inquiries to open the Letter of credit/import collection history page, and then view the amendment history of the letter of credit.
7. Close the pages to save your changes.

You can change the letter of credit amount or number of shipments, if required. You can edit the shipment details only if the packing slip or invoice is not posted.

If you delete a shipment line detail for which the margin was already allocated, the allocated amount is reversed to an unallocated amount on the Letter of credit margin transactions page.

Changes must be confirmed to be saved as amendments. Each confirmed amendment results in a new version of the letter of credit. This helps to track the revision history of the letter of credit.

If shipment line details are changed, the letter of credit details are confirmed only if the total shipment amount does not exceed the letter of credit amount.

Post a margin payment for a letter of credit

When you receive letter of credit advice from the bank, you can check the margin that was collected by the bank and post it in a General journal of the type Daily. To post the transaction against the appropriate posting profile, the Transaction type field must be selected as Margin.

1. Select General ledger > Journal entries > General journals.
2. Select New to create a new journal.
3. In the Name field, select a daily journal, and then select Lines to open the Journal voucher page.
4. In the Debit field, enter the margin amount that was collected by the bank.
5. Select the Payment tab, and then in the Transaction type field, select Margin.
6. The values in the Account type, Account, Offset account type, and Offset account fields are displayed according to the posting profile.
7. In the Letter of credit and import collection field, select the bank document number that is associated with the letter of credit.
8. Select Post > Post to post the journal.
9. Close the page to save your changes. The margin amount for the letter of credit is recorded in the Letter of credit margin transactions page.

Allocate the margin amount to the shipment

To adjust the margin amount at the time of invoicing (partially or completely), the margin amount must be allocated to each shipment. You can use the Letter of credit margin transactions page to allocate the margin amount across shipments for a letter of credit.

1. Go to Cash and bank management > Letters of credit > Import letter of credit and import collection.

2. Double-click the import letter of credit or import collection for which the margin amount must be allocated to the shipment.

3. Select Bank document margin to open the Letter of credit margin transactions page.

4. Select the margin amount line to be allocated, and then select Allocate to shipment to open the Allocate on drop-down dialog box.

5. In the Allocation type field, select Dedicated to allocate the margin amount to a particular shipment or select Distributed to allocate the margin amount proportionally among all shipments that are not invoiced.

6. Select the shipment number in the Shipment number field.

   You can allocate margin amounts only if the value in the Balance field is greater than zero and the shipment that you are allocating to is not already invoiced. If you select Distributed in the Allocation type field, the shipment share of the margin amount is calculated as follows:

   Shipment Share = Margin amount multiplied by (Shipment amount/Letter of credit amount).

7. Select OK to return to the Letter of credit margin transactions page.

8. The Allocated field is updated with the margin amount that was allocated, and the status is updated as Posted.

9. Close the page to save your changes.

10. In the Letter of credit and import collection page, select the Lines FastTab, and then select Shipment margin transactions to open the Shipment margin page and view the margin amount that is allocated to a shipment.

Post a packing slip and an invoice for the purchase order

After the margin is allocated to the shipment, you can post a packing slip and register an invoice for the purchase order. When you post a packing slip, you can specify the shipment number to map the shipment with the delivery. You cannot post the invoice or update a packing slip unless the letter of credit shipment line amount either equals the invoice amount or the shipment variation is within the tolerance limit that is specified in the Tolerance percentage field on the Letter of credit and import collection page.

1. Go to Procurement and sourcing > Purchase orders > All purchase orders.
2. Select the purchase order for the letter of credit that must be invoiced, and then double-click the purchase line to open the Purchase order page.
3. Select the Receive tab, and then select Product receipt to open the Posting product receipt page.
4. Select the shipment number in the Shipment number field, and then select OK to post the packing slip.
5. Select the Invoice tab, and then select Invoice to open the Vendor invoice page.
6. Select the shipment number in the Shipment number field, and then select OK to post the invoice. The invoice amount must be equal to the shipment amount. The shipment status is set as Invoiced.
7. Close the pages to save your changes.

Make a payment for the invoice

After the purchase order is invoiced, you can make the payment and settle the accounts. The payment for the letter of credit must be equal to the amount due minus the margin amount because the margin amount is already collected by the bank. The payment must be within the tolerance limit for the letter of credit.

1. Go to General ledger > Journal entries > General journal.
2. Select New to create a new journal.
3. In the Name field, select a daily journal, and then select Lines to open the Journal voucher page.
4. Enter the required information.
5. Select the Payment tab, and then in the Transaction type field, select Settlement.
6. In the Letter of credit and import collection and Shipment number fields, select the bank document number that is associated with the letter of credit and the shipment number.
7. Select Post > Post to post the journal.

After the settlement invoice is posted, the letter of credit status is set as Closed. The bank account is credited with the amount. The shipment status is set as Paid. You can close a letter of credit only after all the lines are settled against payments.