Most businesses operate in a competitive environment. This necessitates that they offer their products competitive prices to be able to sustain good sales volume. This is why businesses are often seen offering discounts to their customers. There are two types of discount:
Trade Discount
Trade discount is a reduction in the list price of goods by a manufacturer/wholesaler to another business. It is calculated on invoices and is not recorded in the double entry books of account. It is provided due to business consideration such as trade practices, bulk orders and market competition.
Cash Discount
Cash discount is a reduction in the price charged for goods when a credit customer settles their debt within a time period given by the supplier. Cash discount acts as an incentive for credit customers to settle their debts quickly (prompt payment). Cash discount can be allowed to credit customers and received from credit suppliers.
Example 1
Sold goods on credit to John, list price $ 1 500 less 10% trade discount. John is allowed a further cash discount of 8% for prompt payment.
$ | ||
List Price | 1 500 | |
Trade Discount [ 10/100 * 1 500 ] | (150) | Not recorded in the books |
1 350 | Credit sales Account | |
Cash Discount [ 8/100 * 1 350 ] | (108) | Debit cash discount allowed |
1 242 | Debit Cash / Bank |
Example 2
Goods purchased on credit from Sam, list price $ 2 000 less 5% trade discount. The business received a further cash discount of 10% for prompt payment.
$ | ||
List Price | 2 000 | |
Trade Discount [ 5/100 * 2 000 ] | (100) | Not recorded in the books |
1 900 | Debit purchases account | |
Cash Discount [ 10/100 * 1 900 ] | (190) | Credit cash discount received |
1 710 | Credit Cash / Bank |
Three column cash book
A 3-column cash book is used to record cash discount allowed, cash discount received, cash and cheques received and paid during the year. The amount column in the ledger is sub divided into 3 columns each side. Discount allowed is recorded on the debit side and discount received on the credit side.
At the end of the month, the total of the discount allowed column on the debit side of the cash book is posted to the debit side of the Discount allowed account. The total of the discount received column on the credit side of the cash book is posted to the credit side of the Discount received account.
Worked Example
Jan | 1 | Cash in hand $ 2 500 |
Bank overdraft $ 1 200 | ||
2 | Purchased goods by cash $ 300 | |
4 | Sold goods for cash $ 600 | |
7 | Purchased goods by cheque $ 200 | |
9 | Sold goods for cheque $ 700 | |
11 | Received cheque from Raj less 10% cash discount, $ 1 800 | |
12 | Paid Xavier by cheque $ 800 less 8% cash discount | |
14 | Received cheque from Sam $ 1 400 less 5% cash discount | |
17 | Paid Yohan by cheque $1 200 less 4% cash discount | |
18 | Purchased equipment by cash $ 200 | |
19 | Paid electricity by cash $ 400 | |
20 | Withdrew cash for business use $ 1 300 | |
21 | Withdrew cash from bank for family use $ 400 | |
23 | Purchased equipment for home use $ 350 by cash | |
24 | Cash sales banked $ 3 500 | |
30 | Received cheque from Tamy $ 2 800 less 3% cash discount | |
31 | Paid cheque to Zidane $ 2 000 less 10% cash discount. |
DR | Three Column cash book | CR | |||||||
Date | Details | Discount Allowed | Cash | Bank | Date | Details | Discount Received | Cash | Bank |
$ | $ | $ | $ | $ | $ | ||||
Jan-01 | Balance b/f | 2 500 | Jan-01 | Balance b/f | 1 200 | ||||
4 | Sales / Revenue | 600 | 2 | Purchases | 300 | ||||
9 | Sales / Revenue | 700 | 7 | Purchases | 200 | ||||
11 | Raj | 180 | 1 620 | 12 | Xavier | 64 | 736 | ||
14 | Sam | 70 | 1 330 | 17 | Yohan | 48 | 1 152 | ||
20 | Bank ( C ) | 1 300 | 18 | Equipment | 200 | ||||
24 | Sales / Revenue | 3 500 | 19 | Electricity | 400 | ||||
30 | Tamy | 84 | 2 716 | 20 | Cash ( c ) | 1 300 | |||
21 | Drawings | 400 | |||||||
23 | Drawings | 350 | |||||||
31 | Zidane | 200 | 1800 | ||||||
31 | Balance c/d | 3 150 | 3 078 | ||||||
334 | 4 400 | 9 866 | 312 | 4 400 | 9 866 | ||||
Feb-01 | Balance b/d | 3 150 | 3 078 | ||||||
DR | Discount Allowed Account | CR | |||
$ | $ | ||||
Jan 31 | Three column cash book | 334 | |||
DR | Discount Received Account | CR | |||
$ | $ | ||||
Jan 31 | Three column cash book | 312 | |||
Question 1
The following transactions took place in the books of Samira during the month of January.
Jan | 1 | Cash in hand $ 1 500 |
Cash at bank $ 4 200 | ||
3 | Purchased goods by cheque $ 600 | |
5 | Cash sales $ 900 | |
8 | Purchased goods by cheque $ 500 | |
9 | Cash sales banked $ 700 | |
11 | Received cheque from Rajesh less 10% cash discount, $ 2 000 | |
12 | Paid Sahir by cheque $ 900 less 9% cash discount | |
15 | Received cheque from Sania $ 1 500 less 6% cash discount | |
16 | Paid Mauree by cheque $1 500 less 3% cash discount | |
18 | Purchased equipment by cash $ 500 | |
19 | Paid wages by cash $ 600 | |
20 | Withdrew cash for business use $ 1 900 | |
21 | Withdrew cash from bank for family use $ 500 | |
22 | Purchased equipment for home use $ 450 by cheque | |
25 | Sold goods for cheque $ 3 000 | |
30 | Received cheque from Tania $ 2 500 less 2% cash discount | |
31 | Paid cheque to Zoya $ 2 600 less 15% cash discount. |
Prepare a Three column cash book for the month of January.
