Lesson Notes By Weeks and Term - Senior Secondary School 1

SUBJECT: FINANCIAL ACCOUNTING

CLASS:  SS 1

DATE:

TERM: 2nd TERM

TOPIC: Three Column Cash Book 

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)

1. Trade discount is unconditional             Cash discount is conditional: payment must be made

withina specified period of time 

1. 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 

Illustration 

From the following information write up a three column Cash Book of Favour Business Enterprises balance off at the end of the month, and show the relevant discounts accounts as they would appear in the general ledger:

2016 

March    1    Balance brought forward: 

        Cash in hand N21,100

        Cash at bank N89,840

  ”    2    We paid each of the following accounts by cheque, in each case we deducted 5%

cash discount: T. Ankrah N8,000; C. Asafo N26,000; D. Kodjo N44,000

  ”    4    C. Talabi pays us a cheque for N9,800

  ”    6    Cash sales paid direct into the bank N14,900

  ”    7    Paid insurance by cash N6,500

  ”    9    The following persons paid us the following accounts by cheque, in each case they

deducted a discount of 212%: R. Dambo N16,000; J. Apiah N6,400; R. Andrah N5,200

”    12    Paid motor expenses by Cash N10,000

  ”    18    Cash sales N98,000

  ”    21    Paid salaries by cheque N12,000

  ”    23    Paid rent by cash N6,000

  ”    28    Received a cheque for N50,000 being a loan from R.Atadika

  ”    31    Paid for stationery by cheque N8,700

Favour Business Enterprises

Cash Book 

General Ledger 

Discounts Allowed 

2016                        N    2016                        N

Mar 31        Total for the month        690   

Discounts Received

2016                        N    2016                        N

                            Mar 31     Total for the month        3,900

N.B: Note that the discount columns in the Cash Book are totaled and not balanced. They are to be added weekly or monthly at the time the cash and bank columns are balanced and ruled off. the totals of the discount columns are taken to the discounts accounts in the ledger and are entered on the same sides of these accounts as they are found in the Cash Book

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 
2. State four differences between trade discounts and cash discounts