BOOKING OF LC & TR TRANSACTIONS (WIP)

A2000 ONLINE SUPPORT DEPARTMENT

KNOWLEDGE BASE

DESCRIPTION         Many companies do not track Letter of Credit balances in their books but simply track separately as trade line utilized. Only at the point of document acceptance (convert to a Trust Receipt) will they start booking in the debt and using the T/R to offset the bill with their supplier. The user may also opt to use A2000ERP to track such balances.

1.  SCENARIO

Take a scenario of Computer Supplies International (CSI) is a trading company using A2000ERP. 

d. When the goods arrive in Singapore, they need a Shipping Guarantee to claim the cargo. They then proceed to DBS Bank to sign a Trust Receipt (90 days) at 5% per annum for the 15 million Yen. After this done, DBS release the S/G to them to claim cargo. CSI no longer owes OSAKA CO. but owe directly to DBS BANK. [Show how the transaction is entered in A21]. 

e. They must book in landed cost items of US$500 for freight, S$200/- for local transport and US$175/- for insurance in the shipment. [Show how this transaction with multi-currency components, is entered in A21]. 

e. After 90 days, they need to pay DBS BANK for the Trust Receipt. [Show how the transaction is entered in A21] 

2.  SOLUTION

Some others feel we should book in the liabilities, as an L/C is certainly one. A21 can also do it, and hereunder are the steps to take: 

Step 1:    In Purchase, issue a Purchase Order (SO transaction) to reflect order to OSAKA.

Step 2:  Normally a bank L/C line or facility would comprise also a Trust receipt Line. And these are usually combined limits; for example a $500,000 L/C and T/R line. It means that if you use $100,000 in L/C, you have only $400,000 in T/R left. As you pay down the T/R (usually on 90 days), your combined line gets freed up. 

It becomes crucial to track these, or the company may end up with line "being full". 

Create 3 new chart of account codes (all balance sheet items) in the General Ledger to reflect DBS L/C and T/R Facility" and another "L/C Contingent Liability". 

Step 3:  When you open your first L/C, pass a GJ journal as followed: 

              GJ-Transaction                          DR                 CR 

              DBS L/C & T/R Facility                                      15,000,000 Yen 

              L/C Contingent Liability                 15,000,000 Yen

              - This entry book in L/C facility consumed. 

              - Also recognize you book in a contingent liability.

When the bank sends you an Debit Advice Slip after opening the L/C, simply enter under a GC transaction:

              GC-Transaction                         DR                CR 

              DBS Current A/c                                              $ 480/- 

              L/C Commission                          $450/- 

              Telex Charges                             $ 20/- 

              Postage & Courier                                  $ 10/-  

              - This will reflect all bank charges related to this L/C.

Step 4:  Goods arrived, consigned to DBS Bank. To claim the cargo, you need to apply a Shipping Guarantee. The transaction to handle the Shipping Guarantee is through a GJ transaction. 

              GJ-Transaction                 DR                         CR 

              DBS L/C Facility                 15,000,000 Yen 

              DBS T/R Facility                                              15,000,000 Yen

- This transaction squares off your L/C line (reduce it down). 

- Transfer your liability to T/R line where interest starts counting. 

At the same time enter a Supplier Invoice (in this case, an Invoice on P/O). Select the supplier and item you wish to input. The transaction will look like this: 

              SE-Transaction                 DR                         CR 

              Purchase A/c                     15,000,000 Yen 

              Trade Creditor                                                15,000,000 Yen 

              Purchase A/c                                                  15,000,000 Yen 

              Stock A/c                          15,000,000 Yen      

- This transaction will square off the Pending P/O position. 

                 - Recognizes purchase to OSAKA for future analysis of purchases. 

             - It books in the stock at respective values.

Step 5:  The earlier T/R signifies that your bank will reimburse direct to your OSAKA supplier. It clears your obligation with the supplier and recognizes the T/R debt (via the Shipping Guarantee) at your bank. In recognizing this transaction, go to PV and select OSAKA as supplier, and in details select Contingent Liability.

              PV-Transaction                         DR                          CR 

              L/C Contingent Liability                                     15,000,000 Yen 

              Trade Creditor                   15,000,000 Yen

              - Squares off L/C Contingent Liability of 15,000,000 Yen in Debit. 

              - It clears the supplier bill and reduces the Trade Creditor balance.

Step 6:  For hedging of foreign currency, there are essentially 2 ways to handle. 

1. The easy way is not to do anything; simply book a forward contract with the bank at a pre-agreed rate   where they use this rate to offset your T/R balance after 90 days. Use this same rate for your Step 4 (GJ Transaction). When the squaring kicks in, there will be no exchange gain/loss.  
2. The second way is to recognize the forward contract as another transaction. First, create a Japanese Yen Bank A/c. When you confirm a rate with the bank, go to this Jap Yen Bank A/c and perform a buying of Yen at the prescribed rate of today. After 90 days, when you need to square off the T/R account, use the Jap Yen Bank A/c to do it and there will be no exchange gain/loss occurring. 

At times these transactions produce “orphaned records” that are could be misleading.

In some cases, there are “stubborn errors that cannot be solved by zooming to the transactions (listed in the diagnostic), and SAVE again. If the errors persist in the Diagnostic listing; it could be due to erroneous allocations that need to be re-created.  Zoom into the respective transaction and delete the allocations (within the lower left box). Save the transaction to effect a repost. Edit back this transaction and re-allocate the invoices.

Note (*) - from Version 1167 of A2000ERP, we have built a logic that every changes to the transaction contents will trigger an auto-post.  However for older system versions, this remains a possibility for the discrepancy. Please check with our technical department for system pre-requisites before any upgrade request

3.  IF ALL ELSE FAIL…

If all the above are done and the problem persist, it could be a combination of factors that need professional help. 

Contact our Tech Department for a quote on the forensic services you may need.

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