Three Column Cash Book – JSS2 Business Studies Lesson Note (Second Term)

A three-column cash book is a cash book with a discount column, a cash column and a bank column on each side. It records cash and bank transactions together with the discounts allowed to customers and received from suppliers. Contra entries are marked ‘C’ in the folio column.

Behavioural objectives

By the end of the lesson, students should be able to:

1. state what a three-column cash book is;
2. distinguish between discount allowed and discount received;
3. explain what a contra entry is;
4. record transactions in a three-column cash book and balance it.

What is a three-column cash book?

A three-column cash book is a cash book made up of a cash column, a bank column and a discount column on both sides.

• Cash column: records money received and paid in notes and coins.
• Bank column: records money paid into or out of the bank, including cheques.
• Discount column: records discounts allowed (debit side) and discounts received (credit side).
• Double role: it acts as both the cash account and the bank account, so these two accounts are not kept again in the ledger.

What is cash discount?

Cash discount is a reduction in the amount owed, given for prompt payment. There are two types: discount allowed and discount received.

• Formula: discount = rate ÷ 100 × amount.
• Example: 5% of ₦1,000 = 5 ÷ 100 × 1,000 = ₦50.
• Amount paid: amount due minus discount, so ₦1,000 less ₦50 gives ₦950.

What is discount allowed?

Discount allowed is a reduction given by the business to debtors (customers) for prompt payment.

• Nature: it is an expense to the business.
• Cash book: entered in the discount column on the debit side.
• Profit and loss account: the total is debited.

What is discount received?

Discount received is a reduction granted to the business by creditors (suppliers) for prompt payment.

• Nature: it is a revenue (gain) to the business.
• Cash book: entered in the discount column on the credit side.
• Profit and loss account: the total is credited.

What is the difference between discount allowed and discount received?

What is a contra entry?

A contra entry is a transaction whose debit and credit entries are both made in the same book of account, here the cash book.

• Folio mark: the letter ‘C’ is written in the folio column on both entries.
• Cash paid into the bank: debit the bank column, credit the cash column.
• Cash withdrawn from the bank for office use: debit the cash column, credit the bank column.
• Why no ledger posting: both sides are already in the cash book.

What is the layout of a three-column cash book?

The three-column cash book has a debit side on the left and a credit side on the right.

• Dr (left) side: Date, Particulars, F (folio), Discount allowed, Cash, Bank.
• Cr (right) side: Date, Particulars, F (folio), Discount received, Cash, Bank.

Which items go on each side of the cash book?

Money coming in goes on the debit side and money going out goes on the credit side.

• Debit side: capital introduced, cash sales, cheques and cash received from debtors, cash paid into the bank.
• Credit side: cash and cheque payments for expenses and purchases, payments to creditors, cash withdrawn from the bank.
• Discount allowed: debit side, beside the money received from the customer.
• Discount received: credit side, beside the money paid to the supplier.

Worked example: how do you record transactions in a three-column cash book?

Olowolayemo started the business with ₦10,000 cash as of 1st Jan. 2014. The transactions for the month were as follows.

• Jan 3: Paid rent by cash, ₦1,500.
• Jan 5: Paid insurance by cash, ₦250.
• Jan 7: Received a cheque from Mutiat for ₦3,000.
• Jan 9: Cash sales of ₦1,000 with 5% discount.
• Jan 12: Cash purchases of ₦2,000 with 3% discount.
• Jan 15: Paid office expenses by cheque, ₦400.
• Jan 18: Paid transport by cheque, ₦200.
• Jan 20: Paid ₦1,200 of the cash into the bank.
• Jan 25: Purchased goods by cash, ₦1,500 with 5% discount.

Three-column cash book of Olowolayemo

What should students notice in the example?

• Contra entry: the ₦1,200 paid into the bank on 20 January is credited in the cash column and debited in the bank column.
• Cash sales: ₦1,000 less 5% discount (₦50) gives ₦950 in the cash column.
• First purchase: ₦2,000 less 3% discount (₦60) gives ₦1,940 paid.
• Second purchase: ₦1,500 less 5% discount (₦75) gives ₦1,425 paid.
• Cheque from Mutiat: goes into the bank column, not the cash column.
• Cheque payments: office expenses and transport go in the bank column on the credit side.

How do you balance a three-column cash book?

To balance a three-column cash book, balance the cash and bank columns separately and only add up the discount columns.

1. Add up the cash column and the bank column on the debit side.
2. Add up the payments in the cash column and the bank column on the credit side.
3. Subtract the payments from the receipts to find each balance (cash: 10,950 less 6,315 gives ₦4,635; bank: 4,200 less 600 gives ₦3,600).
4. Write the balance as “Balance c/d” on the credit side, in the cash and bank columns.
5. Write the same total at the foot of both sides of each column.
6. Write the balances as “Balance b/d” on the debit side on the next day (Feb 1).
7. Total each discount column without balancing it.

What happens to the discount totals?

The discount totals are posted to the ledger at the end of the period.

• Total discount allowed (₦50): debited to the discount allowed account.
• Total discount received (₦135): credited to the discount received account.

What mistakes should students avoid?

• Wrong column: putting a cheque in the cash column.
• Wrong side for discount: discount allowed belongs on the debit side only.
• Forgetting contra: every contra entry needs two entries and the letter ‘C’ on both.
• Balancing discount columns: discount columns are only totalled.

Evaluation

1. What are the three columns on each side of a three-column cash book?
2. Explain discount allowed and discount received.
3. What is a contra entry, and which letter is written in the folio column?
4. Calculate the discount allowed on cash sales of ₦1,000 at 5%.
5. Calculate the discount received on cash purchases of ₦2,000 at 3%.

Assignment

1. Using the example above, state the cash balance and the bank balance brought down on 1 February, and show how the discount received total of ₦135 was obtained.