Cash Book with Discount Columns: Recording MCQs Quiz | Class 9

Understanding the Cash Book with Discount Columns

A Cash Book with Discount Columns, also known as a two-column cash book, is a special journal that serves the dual purpose of a cash account and a discount account. It has separate columns for cash and cash discount on both the debit (receipts) and credit (payments) sides. This format is used to conveniently record cash transactions that involve cash discounts.

Key Concepts

Before diving into the mechanics, it’s essential to distinguish between two types of discounts:

• Trade Discount: This is a reduction in the list price of goods, usually given for bulk purchases. It is NOT recorded in the books of accounts. The transaction is recorded at the net amount (List Price – Trade Discount).
• Cash Discount: This is an incentive offered to debtors for making prompt payments. It is always recorded in the books.

Recording Discounts in the Cash Book

The two-column cash book simplifies the recording of cash discounts:

1. Discount Allowed (Receipts/Debit Side)

When a business receives cash from a customer and allows them a discount for early payment, it is recorded on the debit (receipts) side. The actual cash received is entered in the ‘Cash’ column, and the discount given is entered in the ‘Discount Allowed’ column. ‘Discount Allowed’ is an expense for the business.

2. Discount Received (Payments/Credit Side)

When a business pays a creditor and receives a discount for making a prompt payment, it is recorded on the credit (payments) side. The actual cash paid is entered in the ‘Cash’ column, and the discount obtained is entered in the ‘Discount Received’ column. ‘Discount Received’ is an income for the business.

Handling the Totals of Discount Columns

This is a crucial aspect and a common point of confusion. Unlike the cash column, the discount columns are not balanced.

• The two discount columns (one on the debit side, one on the credit side) represent two separate accounts: ‘Discount Allowed Account’ and ‘Discount Received Account’.
• At the end of the period, each discount column is simply totaled.
• The total of the ‘Discount Allowed’ column (debit side) is posted to the debit side of the ‘Discount Allowed Account’ in the General Ledger.
• The total of the ‘Discount Received’ column (credit side) is posted to the credit side of the ‘Discount Received Account’ in the General Ledger.

The cash columns are balanced in the usual way to find the cash in hand at the end of the period.

Example Transaction Entry

Suppose ‘Received Rs. 980 from Ram in full settlement of his account of Rs. 1,000’.

Here, Rs. 20 is the discount allowed, recorded in its respective column.

Quick Revision Points

• Discount Allowed is an expense and has a debit balance. It appears on the debit side of the Cash Book.
• Discount Received is an income and has a credit balance. It appears on the credit side of the Cash Book.
• The discount columns are only totaled, not balanced.
• The total of the Discount Allowed column is debited to the Discount Allowed A/c.
• The total of the Discount Received column is credited to the Discount Received A/c.
• Trade discount is never shown in the books of accounts.

Extra Practice Questions

1. Journalize the transaction: ‘Paid to Shyam Rs. 1,450, discount received Rs. 50’. Then show how it will be posted in a two-column cash book.
2. What is the fundamental difference between balancing the cash column and totaling the discount column?
3. If a business has Discount Allowed of Rs. 500 and Discount Received of Rs. 700 for a month, what entries are made in the General Ledger for these totals?
4. A cheque received from a customer is dishonoured. The discount previously allowed to them was Rs. 100. What is the journal entry to cancel this discount?
5. Why is trade discount not recorded in the accounting books?