Topic: THREE COLUMN CASH BOOK

Lesson contents:
i. Reasons for granting discount
ii. Calculation of discount
iii. Discount allowed and received
iv. Cash, trade, quantity and seasonal discount

Meaning of Three Column Cashbook

The three column cashbook is a type of cashbook, which contains columns for transactions by cash,
cheque and discounts in one book. A three-column cash book has a third column (in addition to the two
columns for bank and cash) for recording the cash discounts allowed to debtors (debit side) and
received from creditors (credit side). A cash discount is the amount allowed off. (i.e. deducted from)
debts to encourage settlement of the debts within a specified period of time.

In a typical trading organisation, cash discounts are fairly common and require a large number of
entries. If these are posted directly to the discount allowed account (when cash discounts are allowed
to debtors) or discount received account when cash discounts are received from creditors) both
accounts will end up containing too many entries. If this is to be avoided, it is necessary to modify the
recording process so that postings are only made periodically to the discounts accounts in the general
ledger. This need is met by adding a third column to the cashbook to record the cash discounts on a
memorandum basis before the periodic totals are transferred to the discounts accounts. The discount
column on the debit side of the cash book is for discounts allowed to debtors while the discount
column on the credit side records discounts received from creditors. For example, when a customer is
allowed a cash discount, this is listed in the discount allowed column while the personal account of the
customer is credited.

At the end of the period, the total of the discount allowed column is transferred to the debit side of
discount allowed account in the general ledger. Conversely, when cash discount is received from a
creditor, this is listed in the discount received column while the creditor's personal account is debited.
The creditor's personal account is debited with amount of discount received from him while at the end
of the period; the total of discount received column is transferred to the credit side of the discount
received account in the general ledger.

Meaning of Discounts
A discount is a reduction in the price of goods and services granted to encourage the customer buy
large quantity and pay up his debts within a reasonable period.

Advantages of Discounts
1. Discounts help to ensure steady cashflow of the business
2. It help to control the customer’s spending
3. It helps to meet up sales target
4. It builds good image for the seller
5. It helps in the successful launch of new products
6. It helps to retain loyalty of consumers

Disadvantages of Discounts
1. Discounts constitute a heavy cost on the business thereby increasing its cost of sales
2. It reduces the overall profitability of the enterprise
3. If not properly managed, it could misrepresent the enterprise
4. It is a short term solution to boosting cashflow of the business
5. It gives the consumer undue advantage especially in the open market

Types of Discount
There are two main types of discount, namely:
 i. cash discount; and
ii. quantity discount

Cash Discount
Cash discount is the amount given off on a purchase or sale for immediate cash payment by the
purchaser. The supplier gets benefit of cash payment on items purchased while the purchaser gets
benefits of paying less than what is required e.g. a computer vendor may give 10% cash discount on
purchases that are settled immediately. If Mr. IZUZU purchases N 600, 000 worth of goods, he will
pay N 540, 000 as a result of cash discount.

Cash discount is to encourage the customers to pay promptly.

Quantity Discount
Quantity discount is usually given on a given number of items or value e.g. receive a quantity discount
of 10% on a single purchase of N80,000 and above. If Mr. Adazakare purchases goods valued at
N200,000, he will pay only N180,000 because of the volume discount; by buying goods of N80,000 he
would pay N72,000 because the value has reached the volume discount region.

It is also possible that the discount is on quantity e.g. 10% discount on purchases of X product for
minimum of 50. Anybody who buys 50 units of product of X or above will receive the 10% face value
in Naira or quantity. If Mrs. Zulu buys 50 units she will pay for 45 units only.

Quantity discount is to encourage the customers to buy more of a given product or combination or
certain product or certain value.

The quantity discount does not have a double entry in the accounts. It is merely deducted from listed
prices.