Cash book structures - Two- and three-column cash books

Learning Outcomes

After completing this article, you will be able to describe the structure and purpose of two- and three-column cash books, explain their columns, record cash and bank transactions including discounts, and distinguish clearly between discount allowed and discount received. You will prepare and balance cash books and explain their role in the accounting process for ACCA FA2.

ACCA Maintaining Financial Records (FA2) Syllabus

For ACCA Maintaining Financial Records (FA2), you are required to understand how cash book structures are used to record cash and bank transactions efficiently. Focus your revision on:

• Recording cash and bank transactions accurately in the accounting system
• Understanding the structure and function of both two- and three-column cash books
• Accounting for discounts allowed and discounts received within the cash book
• Balancing and updating cash books as part of double-entry bookkeeping
• Explaining the distinction and separate recording of cash, bank, and discount columns

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which column is exclusive to a three-column cash book but not a two-column cash book?
   1. Cash
   2. Bank
   3. Discount
   4. Receivables

2. True or false? The discount allowed column always appears on the credit side of the cash book.

3. What is the double-entry for recording a receipt from a customer which includes a discount allowed?

4. Briefly explain why it is necessary to distinguish between discounts allowed and discounts received in a cash book.

Introduction

Accurate recording of cash and bank transactions is a central skill in bookkeeping. The cash book serves as a book of prime entry, summarizing both cash and bank movements as they occur. Two-column and three-column cash books provide clear formats to track receipts, payments, and discounts in one place, simplifying double-entry procedures and supporting bank reconciliation. For ACCA FA2, competence in both structures—and their practical applications—is required.

Key Term: cash book
A book of prime entry that records all cash and bank receipts and payments by the business, often combined with discount columns for three-column formats.

Core Structures of the Cash Book

The Two-Column Cash Book

A two-column cash book has:

• A cash column: For transactions involving coins and notes
• A bank column: For all amounts paid into or out of the business's bank account

Each side of the cash book (debit and credit) contains these two columns, allowing all receipts and payments to be tracked side by side. This format is suited to businesses routinely handling both cash and bank transactions but not recording discounts within the cash book itself.

Key Term: two-column cash book
A cash book format with columns for cash and bank, used to record all receipts and payments but not discounts.

The Three-Column Cash Book

The three-column cash book extends the structure by adding a discount column:

• Cash column
• Bank column
• Discount column: Divided into Discount Allowed (debit side) and Discount Received (credit side)

This format captures not only cash and bank entries but also any discounts allowed to customers and received from suppliers on prompt settlement. It improves visibility of discount activity, supporting accurate posting to relevant discount accounts in the ledger.

Key Term: three-column cash book
A cash book that includes columns for cash, bank, and discounts (allowed and received), recording all relevant elements of cash, bank, and discount transactions.

Key Term: discount allowed
A reduction given by a business to its customers for prompt payment, recorded on the debit side of the cash book and expense in the profit or loss account.

Key Term: discount received
A reduction obtained by a business from its suppliers for prompt settlement of accounts, recorded on the credit side of the cash book and income in the profit or loss account.

Recording Entries in the Cash Book

Receipts and Payments

• Debit Side: All receipts (cash in, bank in), plus discounts allowed to customers
• Credit Side: All payments (cash out, bank out), plus discounts received from suppliers

Where both cash and a discount are involved (e.g., payment from a customer less discount), each element is recorded in its relevant column.

Handling Discounts in Three-Column Cash Book

Discount columns do not form part of the cash book’s balance. Instead, daily or periodical totals from these columns are posted to the general ledger:

• Discount allowed (debit side) totals are posted to the Discount Allowed account (expense)
• Discount received (credit side) totals are posted to the Discount Received account (income)

Balancing the Cash Book

At the end of the period, balance the cash and bank columns just as any other ledger account. Note that the cash column should never show a credit (negative) balance.

Worked Example 1.1

A sole trader receives a cheque from a customer totalling £950. The original invoice was £1,000. The customer deducts a £50 prompt payment discount.

How are these entries recorded in a three-column cash book?

Answer:

• Debit side of the cash book:
  • Discount allowed: £50
  • Bank: £950
• The customer's account in the ledger is reduced by the total: £1,000

Worked Example 1.2

A business pays a supplier £970 in full settlement of a £1,000 invoice, taking a £30 discount for prompt payment.

How should this be recorded in a three-column cash book?

Answer:

• Credit side of the cash book:
  • Bank: £970
  • Discount received: £30
• The supplier's ledger account is reduced by £1,000

Format Comparison Table

Exam Warning

Examiner questions often test the difference between recording a discount allowed (customer) versus a discount received (supplier). Always record discounts allowed on the debit (receipt) side, and discounts received on the credit (payment) side.

Revision Tip

Cash column balances cannot be negative. If you calculate a negative cash figure, review your entries for errors in receipts and payments.

Summary

The two-column cash book records cash and bank transactions, while the three-column cash book also records discounts. Discount allowed is recorded on the debit side; discount received is on the credit. Discount columns are not balanced—totals are posted to their respective general ledger accounts. Correct use of these books supports accurate records, double-entry, and cash control.

Key Point Checklist

This article has covered the following key knowledge points:

• Define cash book, two-column, and three-column cash books
• Identify when to use each cash book format
• Record transactions involving cash, bank, and discounts in the appropriate columns
• Distinguish between discount allowed and discount received, and their placement in the cash book
• Balance the cash book and explain how discount columns are posted to the ledger

Key Terms and Concepts

• cash book
• two-column cash book
• three-column cash book
• discount allowed
• discount received