How many journal entry will effect for posting of LC letter of credit?

Accounting for a letter of credit on your balance sheet depends on when you use it. One issued by your financial institution acts as a credit substitute. That institution, often a bank, steps into your shoes and pays the seller. You're then responsible for repaying the bank. When you use the letter of credit, record the transactions in your accounting system and disclose them on the company's balance sheet.

Until you actually use the letter of credit for a business transaction, it's an off balance sheet disclosure. Under Generally Accepted Accounting Principles, assets, liabilities, revenue and expenses are only recognized when they actually happen. Since a letter of credit guarantees a future liability, there's no actual liability to recognize. As a result, letters of credit are disclosed as a footnote to the balance sheet.

If you buy equipment, capital assets and inventory without using the letter of credit, the purchase is accounted for either as cash or credit. The equipment or inventory you buy is listed as a balance sheet asset and a credit purchase appears in the sheet's liabilities section. If you pay cash, debit the asset account and credit cash. For example, to account for a $5,000 inventory purchase, debit Inventory for $5,000 and credit cash for $5,000. If you're using credit, debit Inventory for $5,000 and credit accounts payable for $5,000.

When you buy using your letter of credit, debit the asset account and credit the letter of credit account. For example, you purchase $50,000 of inventory using the letter. The bank then charges you a $250 bank fee and a $2,000 advisory fee. Debit the Inventory account for $50,000 and debit the letter of credit-cash account for $2,250. Credit the letter of credit-payable account for $52,250. All three entries are reflected on the balance sheet.

Repaying the letter of credit amount is treated like an accrued liability. For example, you might have a $50,000 letter of credit balance. The bank fees are $250 and the advisory fees are $2,000. Debit the letter of credit-payable account for $50,000 and credit cash for $50,000. Next, debit letter of credit-bank charge for $250 and letter of credit-advisory fee for $2,000 and credit cash for $2,250. On the balance sheet, the cash account is reduced by the $50,000, $250 and $2,000 payment. The letter of credit-payable balance sheet account has a zero balance. The advisory fee and bank charge appear on the income statement.