Letter Of Credit Definition Accounting. This arrangement is sometimes demanded by a third party that wants to ensure itself of the credit quality of a prospective customer, especially in international trade deals. A letter of credit is a financial tool that can be very useful in some situations.
The issuer of the letter of credit is the financial institution that issues the letter of credit. The letter of credit states that the bank will guarantee payment up to the stated amount for transactions of its customer (named in the letter of credit). A letter of credit is the buyer’s banker’s promise to the bank of the seller / exporter that the bank will honor the invoice presented by the exporter on due date and make payment, provided that the seller/exporter has complied with all the requirements and conditions set by the importer in the said letter of credit or the buyer’s.
Company wishing to purchase significant amounts of goods on a buying trip to the pacific rim.
When a letter of credit is issued, the issuing bank requires the buyer to have cash in her account or credit available on a credit line to satisfy the payment amount on the letter of credit. Said financial institution records the letter of credit as being a contingent liability, meaning that it makes no entry for the document until it has been exercised. What does letter of credit mean? A letter of credit is a document from a bank or a financial institution on the buyer’s behalf that assures the payment to the seller.