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This paper will serve as a basic tool in understanding letters of credit and The solution given in this case study is specific to Letter of Credit transactions of our client .
Case History
Documentary credits, commercial letters of credit or just letters of credit, play an integral part in facilitating international trade while providing a secure and reliable means of payment. Clients is using letters of credit. To map payments using Letters of credit in Oracle Payables module we suggested the given solution without any customization.
Pre-requisites.
DFF for tracking additional costs and PO for a respective LC
(Segment value set should be an LOV like vehicle number in AP)
Customize report should be developed which uses DFF values to see LC cost entries.
Raise a Purchase Order in Oracle Purchasing stating the description of goods, quantity, unit price, and terms of delivery. Purchase order would be issued after beneficiary examined that all the terms and conditions of letter of credit are/can be complied with. Letter of Credit number and/or other details can be tracked on Purchase Order with the help of
DFF.
2.
In case of confirmed sight letter of credit the confirming bank is obliged to honour the drawing without recourse to the beneficiary. Beneficiary (Seller) should present following documents to Advising / Confirming Bank: Account Prepayment General Creditor General 3. For Payment of the above Prepayment Invoice Debit XXXX Credit XXXX
Record a dummy payment against the above Prepayment Invoice. For making this dummy payment, a Dummy LC Bank or Dummy LC Bank Account (under a Bank through which Letter of Credit has been processed) can be created. Account Creditor General LC Payment Clearing Account Debit XXXX Credit XXXX
4. Simultaneously, raise an Invoice against Bank to record the liability towards payment made by Bank to Vendor. Account LC Payment Clearing Account Creditor General 5. Payment to Bank Account Creditor General Bank / Bank Clearing Account Debit XXXX Credit XXXX Debit XXXX Credit XXXX
6. For Payment of Insurance, Bank and Other Charges Record Invoices for respective Bank, or Agent Create standard invoices to record additional costs on LC. Enter LC number in DFF or any unused field on Invoice. A customized report should be created to see total balance per LC in Transfer Credit. Which then should be used as an additional cost while making Inter-org transfer
(Transfer Credit account will be used as a clearing account for additional costs)
Account
Debit
Credit
Transfer Credit Creditor General 7. Make Payment to Bank and Agents. Account Creditor General Bank / Bank Clearing Account
XXXX XXXX
Debit XXXX
Credit XXXX
8. Receipt of Goods On receipt of goods record a receipt transaction in Inventory Account Inv Rec Account AP Accrual Account Debit XXXX Credit XXXX
9.
Delivery of Goods
Record a Delivery Transaction in Inventory Account Inv Store Account Source IO Inv Rec Account 10. Inter-Org Transfer. Account Inv Store Account Destination IO ) Store Account Source IO Inv Transfer Credit Debit XX+YY Credit XX YY Debit XXXX Credit XXXX
10. On receipt of Invoice from Vendor Enter an Invoice in Oracle Payables & match it with Purchase order: Account AP Accrual Account Liability Account Debit XXXX Credit XXXX
11. Apply the prepayment against above Invoice Account Creditor Ledger Prepayment General Debit XXXX Credit XXXX