Three-column cash book: worked examples

Method and where the marks are

The three-column cash book is both a book of prime entry and part of the ledger. Each side has three columns: discount, cash and bank. The cash and bank columns are ledger accounts in their own right, so entries in them are part of the double entry.

The discount column is only a memorandum total. It is not an account.

Totalling that column later completes the double entry. Students who treat the discount column as an account post it wrongly and lose several marks at once.

Place the opening balances first. A debit balance on cash or bank goes on the debit (receipts) side, because they are assets. A credit balance on the bank column is an overdraft and goes on the credit (payments) side.

Then work through the transactions in order. Money received goes on the debit side and money paid goes on the credit side. Cash sales received in cash go in the debit cash column.

A cheque paid to a supplier goes in the credit bank column. Keep dates and narratives tidy so the book is easy to total and check.

Discounts are where the marks concentrate. Discount allowed goes on the debit (receipts) side because it relates to money coming in from customers. Discount received goes on the credit (payments) side because it relates to money paid to suppliers.

For example, a customer owing RM1,000 is allowed a 5% cash discount and pays the rest by cheque. Enter RM50 in the discount column and RM950 in the bank column, both on the debit side. The RM950 is the double entry for the bank.

The RM50 is only noted here, and its double entry is completed elsewhere. Many students try to record the full RM1,000, or put the discount in the bank column.

A contra entry arises when money moves between cash and bank within the business, for example cash paid into the bank. Both sides live in the cash book, so you record it twice in the same book. Credit the cash column, because cash leaves the till, and debit the bank column, because money arrives in the bank.

Mark each leg with the letter C, so the reader knows no external account is involved. Cash withdrawn from the bank for office use is the reverse: debit cash, credit bank, both marked C.

To finish, balance the cash and bank columns like any ledger account and carry the balance down. The bank column can show a credit balance carried down if the account is overdrawn. The discount columns are totalled, not balanced.

Post the discount allowed total to the debit of the discount allowed account in the general ledger. Post the discount received total to the credit of the discount received account. Forgetting this step is a common way to drop marks, because the cash book alone leaves the entries half complete.

Marks are mostly lost on four points. Putting a discount figure in the cash or bank column corrupts the money balances. Reversing discount allowed and received is the second.

Remember that discount allowed is an expense and discount received is income. Treating a contra as an external transaction and posting it to another ledger account is the third. It double counts.

The fourth is mishandling an overdraft, either by putting an opening overdraft on the wrong side or by insisting the bank column must show a debit balance.

If discounts and contra entries still trip you up, one of our teachers can drill them with you on past-paper cash books until each entry is automatic. Book a trial class