Prepare a two-column and three-column cash book, including cash discounts and contra entries

What this dot point is asking

SEAB wants you to prepare a two-column and three-column cash book, handling cash discounts and contra entries. The central insight is that the cash book is a clever hybrid: it is both a book of prime entry (the first record of cash and bank transactions) and a ledger account (the cash and bank accounts themselves), and the discount columns are merely memorandum totals that are posted separately, not part of the cash book's own double entry.

The answer

The cash book is two things at once

The cash book records all receipts and payments of cash and through the bank. It is:

• a book of prime entry - the first place these transactions are recorded; and
• a ledger account - it is the cash and bank accounts, so it does not need separate ones in the ledger.

Receipts go on the debit (left); payments on the credit (right).

Two-column and three-column

In the three-column cash book, the extra column records the cash discount on each settlement. Discount allowed appears on the debit (receipts) side; discount received on the credit (payments) side.

Cash discount versus trade discount

• Trade discount - a reduction in list price (for bulk or trade buyers). It is deducted before the invoice, so only the net figure is ever recorded; the trade discount itself is not in the books.
• Cash discount - a reduction for prompt payment. It is recorded: discount allowed is an expense; discount received is income.

Posting the discount columns

The discount columns are not part of the cash book's double entry; they are memoranda. Their totals are posted:

• Total discount allowed - debit a Discount allowed (expense) account.
• Total discount received - credit a Discount received (income) account.

(The other side of each is completed against the customers and suppliers when the cash entry is posted.)

Contra entries

When cash is paid into the bank or drawn from it, both halves are in the cash book, so each is a contra, marked C (credit Cash, debit Bank, or the reverse).

Examples in context

Example 1. Rewarding prompt payment. A supplier offers $2\%$ off a \1,000$bill for payment within 10 days. The business pays$\$980$ and records \20$in the discount received column. The$\$20$ total is later credited to Discount received (income). Trade discount, by contrast, would simply have lowered the invoice to start with and left no entry.

Example 2. One book, two roles. A small trader keeps only a cash book for cash and bank, with no separate cash or bank account in the ledger. Because the cash book is itself the ledger account for these assets, its balances brought down go straight onto the trial balance, showing how it doubles as journal and ledger.

Try this

Q1. State on which side of the cash book receipts are entered, and on which side payments are entered. [2 marks]

• Cue. Receipts on the debit (left) side; payments on the credit (right) side.

Q2. A customer settles a \500$debt by paying$\$485$ for prompt payment. State the discount and how it is classified. [2 marks]

• Cue. A cash discount of \15$ (discount allowed), an expense, entered in the discount allowed column and posted in total to the Discount allowed account.

Q3. Explain why a trade discount does not appear in the cash book. [2 marks]

• Cue. A trade discount is deducted before the invoice is prepared, so only the net amount is recorded; the discount itself is never entered in the books.