Chapter 10 - Three Column cash book


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
  • Cash 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.