Principles of Accounting: Three Column Cash Book

• Most businesses offer credit sales in order to increase sales
• This creates the debtors accounts which are recorded in the ledger and appear in the Statement of Financial Position (Balance Sheet)
• Cash and by extension working capital is the life blood of the business
• To prevent cash flow problems businesses prefer that customers pay quickly
• One way that businesses use to encourage customers to pay promptly is to use cash discounts
• A cash discount is an incentive used by businesses to encourage customers to pay quickly
• The business accepts an amount less than what is owed in exchange for a prompt payment
• On the other hand the business’s own suppliers might  also offer Cash Discounts in exchange for prompt payment
• When it comes to recording these discounts the business has two options
• It can choose to keep using the normal two column Cash Book shown below:

• The two column Cash Book has two amount columns on each side:
  1. Cash column
  2. Bank column
• In this case the business will to maintain  two accounts named Discount Allowed and Discount Received in the General Ledger
• This would mean that every time we have to record  a discount we would have to make entries across three books:
  1. The Purchases Ledger/Debtors Ledger
  2. The Cash Book
  3. The General Ledger
• This is rather tedious and repetitive and might result in errors
• Also in real life each of the above books is in the custody of a different person
• Recording a single transaction would require all three to coordinate
• To make life easier a three column Cash Book is used
• Below is an example of a three column Cash Book

• Instead of maintaining separate Discount Allowed and Discount Received Accounts they are incorporated as additional columns in the Cash Book
• This means the Cash Book now has three columns on each side:
  1. Discount Allowed Column on the debit side and Discount Received Column on the Credit Side
  2. A Cash column on either side
  3. A Bank column on either side
• It is customary to omit the descriptions Allowed and Received
• Thus there three columns on each side:
  1. Discount Column
  2. Cash Column and a
  3. Bank Column
• At the end of each accounting period the discount amounts on each side are added
• The total on the debit side is transferred to the debit side of the Discount Allowed account in the General Ledger
• The total on the credit side is transferred to the credit side of the Discount Received account in the General Ledger
• As a result for the most part of the year each payment involving a cash discount is entered in only two books
• The respective Ledger account and
• The Cash Book
• Only totals are transferred to the  General Ledger at the end of the period

Discount Allowed and Discount Received

• The three column Cash Book is inextricably linked to Cash Discount
• As a result to learn more about making entries in the three column Cash Book click/tap on each of the following topics:
• Discount Received
• Discount Allowed
• Making entries into the 3 column Cash Book

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