Principles of Accounts: Three Column Cash book.
A three column cash book is similar to a two column cashbook but has an extra column to capture discount received and discount allowed on the debit and credit side respectively.
Discount is an allowance given to a trader for goods purchased.
We have two types of discounts as;
a. Trade discount
b. Cash discount
a. Trade Discount.
Is an allowance given in view of the quantity of goods purchased. This discount is shown as a deduction from invoice price and it is the net amount which is entered in both subsidiary sales and purchases day books and in the ledger account. It does not therefore require any further accounting.
b. Cash Discount.
Is allowed or given to induce traders to pay their accounts promptly. The rate of cash discount is usually quoted as a percentage such as 5% of cash discount if payment is made within 30 days. 2.5% cash discount if payment is made within 60days.
Cash discount is further classified into
i. Discount Allowed
ii. Discount Received.
This is normally allowed to the debtors and is a loss to the business. In terms of account transactions:
DR; Discount allowed account
CR; Debtors account.
Normally appears on the debit side of profit and loss account at end of the period being a transfer of the balance or the discount allowed account at the end of the period.
This is discount received from creditors. It is regarded as a gain and at the end of the accounting period appears on the credit side of profit and loss Account. In terms of account transactions:
DR; Creditors account
CR; Discount received acc.