Three Column Cash Book and Discounts

CONTENT

• Discounts – Definition, Types, Features
• Reasons for Granting Discounts
• Differences Between Trade Discounts and Cash Discounts
• Classification on Cash Discounts
• The Three Column Cash Book

Three Column Cash Book

This type of Cash Book combine discount column on both sideto the cash and bank column. The discounts allowed column is on the debit side, while the discounts received column is on the credit side. The principle of double entry is also applicable in the three column Cash Book. It must be noted however that the discount allowed and the discount received columns though they have the appearance of account columns, are merely memoranda, from them we can obtain periodic totals that will be entered in the discounts accounts.

Discounts

This is the reduction in the price of goods given by a trader to his customer in order to encourage bulk purchases or prompt payment

Types of Discounts

1. Trade Discounts: This is the discount given by a trader to encourage his customers to buy in bulk i.e. in large quantities
2. Cash Discounts:This is the discount given by a trader to encourage his customers to settle their accounts promptly

Reasons for Granting Discounts

1. To encourage customers to buy in bulk i.e. in large quantities
2. To encourage prompt settlement of account
3. To avoid (reduce) the risk of bad debts
4. To allow the buyer to have a margin for his own profit
5. To avoid tying down of business capital
6. Discounts attract customers
7. Discounts encourage continuous patronage by loyal customers
8. Discounts increases the sales or turnover of a business

Difference between Trade Discounts and Cash Discounts

Trade Discounts                                                        Cash Discounts

1. Given to encourage bulk purchases                      Given to encourage prompt settlement of account
2. Trade discount is recorded in the journals            Cash discount is recorded in the ledger

(daybooks)

• Trade discount is unconditional                            Cash discount is conditional: payment must be made

withina specified period of time

• Trade discount must be deducted before cash      Cash discount is deducted after trade discount has

discount                                                                been deducted

Classification of Cash Discounts

1. Discounts Allowed: This is the discount a business allows its credit customers (debtors) when they pay their accounts within a set time. This is an expense of the business as it is the cost of having debts settled promptly
2. Discounts Received: This is the discount a business receives from its credit suppliers (creditors) when it pays their accounts within a set time. This is an income of the business as it is the benefit received from settling debts promptly. It is important to realize that discount received does not involve the receipt of money: the supplier simply accepts less money in settlement of the account

EVALUATION

1. Sate four features of each of the following  (a) Trade Discounts     (b) Cash Discounts
2. List five reasons why a trader will grant discount to his customers

EVALUATION

1. Business Accounting 1 Exercise 13.1, 13.2, 13.4A and 13.5A
2. Simplified and Amplified Financial Accounting Exercise 2x; 5; 6x and 7x

READING ASSIGNMENT

1. Simplified and Amplified Financial Accounting page 72 – 86
2. Business Accounting 1 page 97 – 106

GENERAL EVALUATION QUESTIONS

1. Differentiate between Discounts Allowed and Discounts Received
2. State four differences betweenTrade Discounts and Cash Discounts
3. List two similarities between Discounts Allowed and Discounts Received
4. State ten uses of the General Journal
5. List ten ledger accounts that have debit balances

WEEKEND ASSIGNMENT

1. In which of the following books will trade discount be recorded     A. Cash book    B. General Ledger     C. Invoices     D. Purchases Day Book
2. When discount is allowed the accounting entry is debit discount allowed account and credit   A. Expenses Account    B. Suspense account    C. Debtors Account     D. Creditors account
3. The process of entering transaction from one book to another is  A. folio    B. casting   C. posting    D. numbering
4. The column which is not generally balanced but summed up in the three column cash book is the ___________ column    A. bank    B. cash     C. contra    D. discount
5. When both debit and credit entries in respect of a transaction are made in the same ledger account this is   A. a ledger entry    B. an accounting entry    C. a folio entry    D. a contra entry 

THEORY

1. State five reasons why a trader will grant trade discount to his customer

State four differences between trade discounts and cash discounts