The cycle of guarantee letter in the contracting accounting program through the journal entries

The cycle of guarantee letters in the contracting accounting through the journal entries

What does a letter of guarantee mean?

 What is its importance in contracting accounting?

What are the types of letters of guarantee in accounting for contracting companies?

What is the accounting treatment for the letter of guarantee "entries' of letters guarantee in contracting accounting?"

What is meant by Cover Letter of Guarantee?

This is a simplified article in a series of explanations of contracting company accounting. Explaining through the letter of guarantee course in contracting accounting and its application through the daily entries on the accounting and management program of contracting companies Accflex

If, for example, the contractor was in agreement with the owner that he was building a specific building and it was agreed that this building would have certain technical specifications, what would guarantee that after what the contractor delivers the building to is that the building is really good and identical to the specifications?

What does a letter of guarantee mean? What is its importance in accounting for companies?

What are the types of letters of guarantee in accounting for contracting companies?

What is the accounting treatment for the letter of guarantee "Limitations of letters of guarantee in contracting accounting?"

What is meant by Cover Letter of Guarantee?

This is a simplified article in a series of explanations of contracting company accounting explaining through the course of letter of guarantee in contracting accounting and its application through the daily restrictions on the accounting and management program of contracting companies Accflex.

According to the nature of the dealings in contracting companies, the contractor who perform the project is obligated to present to the project owner a document ensuring that he will complete the work, and that he will not break the terms of the agreement in the contract, and this document is known as the "Letter of Grantee

If, for example, the contractor was in agreement with the owner that he was building a specific building and it was agreed that this building would have certain technical specifications, what would guarantee that after what the contractor delivers the building to is that the building is really good and conforms to the specifications?

Hence, the contractor must provide the owner with what proves or guarantees his credibility in dealing, it is natural that he provides him with a letter of guarantee, and if he is not able to implement the fullest destination, the owner can, by letter of guarantee, recover the value of his loss from the bank

 First: What does a letter of guarantee mean?

This letter of guarantee is a document that the bank issues to the contractor in order to present it to the owner in order to ensure through it that the contractor will perform the work and carry out the requirements to the fullest extent, and in the event of non-compliance with the required, the owner goes to the bank and demands the value of the letter of guarantee as compensation for him for the loss resulting from the contractor’s failure to comply. Here the bank has entered a party in the matter because it will be the guarantor in the dealings, and of course the bank will benefit from the interests and expenses of letters of guarantee and so on.

As a contractor, in order to obtain the letter of guarantee, I must have dealings with the bank, and in most cases I have to associate with the bank with a bank facilities contract, which varies from one bank to another.

We can see a sample of it in the Commercial International Bank from here, and we can also see a form for requesting a letter of guarantee in one of the Arab banks.

Second: What are the types of letters of guarantee in contracting accounting?

We have more than one type in the field of accounting for contracting companies, and each type of them will have a specific purpose, and we can see that

lately Initial letter of guarantee

It is expected that after the contractor enters the tender and is awarded, he does not sign the contract and start work, and thus wasting time, effort, and the cost of the owner on the free, and because of this, it is customary that the one who enters the tender pays an initial insurance amount, usually at a rate ranging between 1% to 2% of the contract value,

In the event that the tender is not awarded to the contractor, he will refund this normal amount.

Sometimes, the contractor does not provide the primary insurance in the form of a cash amount, but it is presented in the form of an initial letter of guarantee.

In some cases, the contractor does not provide the primary insurance in the form of a cash amount, but it is presented in the form of an initial letter of guarantee.

This is the letter that the contractor submits to the owner as a preliminary deposit upon entering the tender, and the owner is keen on dealing with the contractor seriously and that he is already in the tender in order to send him, and in the event that the contractor submitted the letter of guarantee and you are not obligated to sign the contract after it is awarded to him, the owner has the right to collect this amount from the bank

Final letter of guarantee

This is a second letter of guarantee that the contractor submits to the owner after the bidder has paid for it, and this is the same idea of the primary, but this is the purpose of it that the contractor prefers a commitment and does not work for the duration of the contract, and in most cases its percentage is 10% of the contract value or according to the agreement, and of course the bank returns the initial letter of guarantee and is issued A new letter of guarantee which is the final letter of guarantee  And we call it a good execution

Advance payment guarantee letter

When the contract is signed with the owner of the project, he pays an advance payment to the contractor, which is usually 5% of the contract value, and on its basis, he works in the project. Easily, the bank asks him for the value of the letter, and the bank is legally bound to spend it.

 Maintenance guarantee letter

In most cases, the contracting contract obliges the contractor in one of the clauses to provide maintenance for the building that the contractor has undertaken, and for that the contractor submits a letter to the owner to ensure that the contractor will comply with the maintenance operations of the building.

In the event that he does not comply with the maintenance operations, the owner can spend the value of the letter and respond to another contractor who performs the maintenance operations.

We can say that the types in the field of contracting accounting are very numerous, and each type has a specific purpose, but in the end the accounting treatment for them is usually the same as we will see.

Accounting treatment of letters of guarantee in contracting accounting

Before we are exposed to a practical case through restrictions in contracting accounting, we must know a very important term called the cover letter of guarantee.

The cover is the amount that the bank is withholding from our account and completing it from me with the remainder of the letter's value, meaning it is correct that if I want a letter of guarantee in the amount of 100 thousand pounds, the bank can reserve 10,000 pounds from our account, but the rest that are 90,000 is completed by it and in return for this, it takes bank commissions. And bank commissions are determined based on the bank facilities contract with the bank.

The practical case of the letter of guarantee

Solve the practical case, prove the issuance of the initial letter of guarantee

The first entry is the proof of issuance of the initial letter of guarantee in the contracting companies accounting and management program, Accflex

Contracting accounting

Second: In the case of tender and contracting fees with the client

Record the proof of the initial letter of guarantee refund in preparation for the issuance of the final letter of guarantee

The most important contracting accounting programs

Third: The proof of issuance of the final letter of guarantee is recorded in the Accflex contracting accounting program

We are able to review the cost centers report for the Administrative Capital project of the Ministry of Communications, in order to see that we are costing us as much as for now.

Report of the Associate Professor of the Cost Center - Capital Project in the Accounting Program for Contracting Companies Accflex

The most important business accounting software

We began to discuss the part of the letters of guarantee in contracting accounting and the accounting treatment of them completely and apply them to the Accflex contracting accounting program.

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