ZIMSEC O Level Principles of Accounts Notes: Source Documents: Three Column Cash Book: Discount Received

  • It is customary for businesses to sell goods on credit
  • In order to encourage prompt payment a business might offer a cash discount
  • In such instances the business will accept a lesser amount in settlement of a debt in exchange for early payment
  • On the other hand the business might also receive a cash discount from its suppliers
  • In such cases the business will be allowed to pay a discounted amount
  • Discounts on purchases are known as Discount Received
  • Discount Received– this is when a business is allowed to pay an amount below the one shown on the invoice by its creditors
  • There are two ways to record Discount Received on the books
  • Using the Discount Received Account for each transaction and a two column Cash Book
  • Using the three column Cash Book and then transferring the total Discount Received to the Discount Received Account at the end of each period
  • The business will have to choose its preferred method of dealing with

The entries required to record Discount Received

  1. If a two column Cash Book is being used and each Discount Received transaction is recorded in the Discount Received Account:
    1. To record the purchase:
      1. Debit the Purchases Account in the General Ledger
      2. Credit the Creditor’s Account i.e the name of the creditor in the Purchases ledger
    2. To record the payment:
      1. Debit the Creditor’s Account i.e. the name of the creditor in the Purchases Ledger with payment amount
      2. Credit Cash/Bank with the amount of the payment
    3. To record the Discount:
      1. Debit the Creditor’s Account i.e. the name of the creditor in the Purchases Leger with the discount received amount
      2. Credit the Discount Received Account with the discount received amount
    4. At the end of the trading period:
      1. Debit the Discount Received Account with the total of Discounts Received for the period
      2. Credit the Profit and Loss Account with the total discount received for the period/Add Discount Received to Gross Profit for the period as additional income
  2. If the business uses a three column Cash Book and a Discount Received Account:
    1. To record the purchase:
      1. Debit the Purchases Account in the General Ledger
      2. Credit the Creditor’s Account i.e the name of the creditor in the Purchases ledger
    2. To record the payment:
      1. Debit the Creditor’s Account i.e. the name of the creditor in the Purchases Ledger with payment amount
      2. Credit Cash/Bank with the amount of the payment
    3. To record the Discount:
      1. Record the discount amount on the credit side of the Cash Book in the same line with the amount paid
      2. Debit the Creditor’s Purchases Account i.e. the name of creditor in the Purchases Leger with the discount received amount
    4. At the end of the trading period:
      1. Transfer the total amount of the total discount received for the period to the credit side of the Discount Received Account in the General Ledger
      2. Debit the Discount Received Account with the total of Discounts Received for the period
      3. Credit the Profit and Loss Account with the total discount received for the period/Add Discount Received to Gross Profit for the period as additional income

NB This all seems to be a mouthful but the example here will help you understand the entries. Click here to see a simple example

To access more topics go to the Principles of Accounts Notes.