How to prepare a three-column cash book

Step by step

1. Set out cash, bank and discount columns. Provide discount, cash and bank columns on each side of the cash book.
2. Record receipts on the debit side. Enter money received in the cash or bank column, and any discount allowed in the discount column.
3. Record payments on the credit side. Enter money paid in the cash or bank column, and any discount received in the discount column.
4. Treat the discount columns as memoranda. The discount columns are not balanced. They are totalled and posted separately.
5. Post the discount totals. Debit discount allowed and credit discount received in the nominal ledger.

Worked example

A customer pays RM950 to settle RM1,000. Enter RM950 in the bank column and RM50 in discount allowed.

Understanding the method

The three-column cash book records receipts and payments in cash and at the bank, and the cash discounts that go with prompt payment. The cash and bank columns are real ledger accounts, so each entry is one side of a double entry. The discount columns are only memorandum totals, which are posted separately.

Money coming in increases an asset, so receipts are debits. Money going out reduces it, so payments are credits.

Discount allowed is a cost to the business when a customer pays promptly, so it sits on the debit (receipts) side. Discount received is a gain when the business pays a supplier early, so it sits on the credit (payments) side.

The cash and bank columns are balanced off like ordinary ledger accounts. The discount columns are not. Their totals are transferred to the general ledger.

Discount allowed goes to the debit of the discount allowed account, and discount received goes to the credit of the discount received account.

Questions may give amounts net of discount and expect you to find the discount. A customer who owed RM1,000 pays RM960 in full settlement. Record RM960 in the bank column and RM40 in the discount allowed column.

The RM40 discount closes the account even though no cash moved. For each line, ask whether money came in or went out, whether it was cash or bank, and whether there was a discount.

Here is an example. The business starts with RM300 cash and RM2,500 at the bank. It receives RM980 by cheque from a customer who was allowed RM20 discount.

It pays a supplier RM588 by cheque and receives RM12 discount. It pays wages of RM150 in cash.

The RM980 goes in the bank column on the debit side, with RM20 in the discount allowed column. The RM588 goes in the bank column on the credit side, with RM12 in the discount received column. The RM150 goes in the cash column on the credit side.

Cash: 300 − 150 = RM150. Bank: 2,500 + 980 − 588 = RM2,892. The discount columns are totalled at RM20 and RM12 and posted to their ledger accounts, not balanced.

The cash column should never be a credit balance, because you cannot pay out coins you do not hold. The bank column can be a credit balance, which means an overdraft.

Common mistakes: balancing the discount columns as if they were money, and putting discount allowed on the payments side or discount received on the receipts side. Others are entering a cheque in the cash column, and forgetting to post the discount totals to the ledger.

If discounts and the two money columns get tangled in your answers, we can help. One of our teachers can work through a three-column cash book with you and show where each figure belongs. Book a trial class

Related skills

• How to prepare a two-column cash book
• How to record contra entries
• How to balance off a ledger account

The methods here are standard accounting practice, with original figures. For your exam board's exact requirements, see exam boards and Sources.