ZIMSEC O Level Principles of Accounts Notes: Source Documents: 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
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:
Cash Book
Cash Bank Cash Bank
Date Details $ $ Date Details $ $
1 Jan Capital 5000 3 Jan Purchases 500
4 Jan Bank 700 4 Jan Cash 700
The two column Cash Book has two amount columns on each side:
Cash column
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:
The Purchases Ledger/Debtors Ledger
The Cash Book
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
Cash Book
Discount Cash Bank Discount Cash Bank
Date Details $ $ $ Date Details $ $ $
1 Jan Capital 5000 3 Jan Purchases 400
11 Jan L Mudadi 20 480 4 Jan E Mhandu 50 450
23 Jan K Moyo 40 960
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:
Discount Allowed Column on the debit side and Discount Received Column on the Credit Side
A Cash column on either side
A Bank column on either side
It is customary to omit the descriptions Allowed and Received
Thus there three columns on each side:
Discount Column
Cash Column and a
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.
