Cash book structure and use - Cash discounts allowed and rec...

Learning Outcomes

After reading this article, you will be able to explain the role and structure of the cash book, accurately record cash and settlement discounts allowed and received, distinguish between different types of discounts, and apply the correct double-entry for both discounts allowed and discounts received. You will develop the ability to identify and avoid common errors, ensuring cash discounts are accounted for in accordance with ACCA FA1 principles.

ACCA Recording Financial Transactions (FA1) Syllabus

For ACCA Recording Financial Transactions (FA1), you are required to understand how cash books are structured, how discounts are treated in accounts, and how to record both discounts allowed to customers and discounts received from suppliers. It is essential for revision to focus on:

• The structure and dual purpose of the cash book as a book of prime entry and ledger account
• Recording receipts and payments in the cash book, including cash and bank transactions
• Differentiating between trade discount and settlement (cash) discount
• The double-entry required for settlement discounts allowed and received in the general ledger
• Posting from the cash book to ledger accounts
• Recognising common errors when recording discounts in financial records

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. When a business allows a customer a cash discount for prompt payment, which account is debited in the seller's general ledger?
   1. Cash at bank
   2. Discount allowed
   3. Discount received
   4. Trade receivables
2. If a business receives an early payment discount from a supplier, what is the correct double-entry?
   1. Debit Cash at bank, credit Discount allowed
   2. Debit Discount received, credit Payables
   3. Debit Payables, credit Cash at bank and Discount received
   4. Debit Discount allowed, credit Sales

3. True or false? A trade discount is recorded in the cash book when the invoice is entered.

4. Provide a brief explanation of how the cash book serves as both a ledger and a book of prime entry.

Introduction

Accurate accounting for cash transactions and discounts is essential in the financial record keeping of any business. The cash book records day-to-day money received and paid, acting as both a subsidiary ledger and a book of prime entry. In commercial practice, businesses frequently offer or receive cash (settlement) discounts to speed up payments. These discounts must be distinguished from trade discounts and are recorded via specific cash book columns and ledger entries. For success in the ACCA FA1 exam, you need to know the structure of the cash book, when to recognise settlement discounts, and how to post these correctly.

Key Term: cash book
A book of prime entry and subsidiary ledger recording all cash and bank receipts and payments.

Key Term: trade discount
A deduction from the list price of goods, agreed between buyer and seller, which is not recorded in the accounting records.

Key Term: settlement discount (cash discount)
A discount offered for prompt payment, recorded in the accounting system as discount allowed (by the seller) or discount received (by the buyer).

THE CASH BOOK AND ITS STRUCTURE

The cash book is the principal record for all money received (on the debit side) and all money paid out (on the credit side). It is updated daily from source documents such as receipts, cheques, or remittance advices. Most businesses use a columnar cash book to distinguish between cash, bank, and discounts.

• Receipts (left side): Shows all money coming in, typically analysed into cash sales, bank receipts from credit customers, and other income.
• Payments (right side): Shows all money paid out, such as payments to suppliers, wages, petty cash transfers, or expenses.

A typical cash book also contains dedicated columns for settlement discounts, making it easy to separate amounts received or paid from discounts allowed or received.

The Purpose of Discount Columns

Settlement (cash) discounts given to customers (discount allowed) and discounts claimed from suppliers (discount received) must be entered in these columns, not together with the main cash or bank columns. This approach helps with both practical record checking and with correct double-entry posting.

RECORDING CASH DISCOUNTS: SELLER VS BUYER

Discounts can arise either as a deduction for customers who pay quickly (discount allowed), or for the business itself when it pays suppliers promptly (discount received). Handling these correctly is essential for faithful financial reporting.

Recording Discounts Allowed (Seller Viewpoint)

When a business receives payment from a customer who deducts a settlement discount, the receipt is entered in the cash book as two parts:

• Cash/bank column — the actual amount received
• Discount allowed column — the value of the discount given

The total of the cash/bank and discount allowed columns should match the original invoice total. The corresponding general ledger entries are:

• Debit: Cash at bank (amount received)
• Debit: Discount allowed (amount of discount)
• Credit: Receivables (total amount owed)

Key Term: discount allowed
The settlement discount offered by a business to its customer for prompt payment, recorded as an expense.

Recording Discounts Received (Buyer Viewpoint)

If the business pays a supplier early and claims a settlement discount, the same principle applies:

• Cash/bank column — the amount paid to the supplier
• Discount received column — the value of the discount received

The ledger entries are:

• Debit: Payables (total invoice amount)
• Credit: Cash at bank (amount paid)
• Credit: Discount received (discount claimed)

Key Term: discount received
The settlement discount obtained from a supplier for early payment, recognised as income.

TRADE DISCOUNTS VS CASH (SETTLEMENT) DISCOUNTS

It is important not to confuse trade discounts with settlement (cash) discounts.

• Trade discounts are reductions from the advertised price, agreed at the time of sale, and not recorded in the accounts. Only the net invoice amount appears in the cash book and ledgers.
• Settlement (cash) discounts are reductions for early payment, recorded in both the cash book and ledgers when payment is made.

Worked Example 1.1

Almond Ltd invoices a customer, Blake, for goods worth $1,200 (no sales tax). The invoice allows a $200 trade discount and a 2% settlement discount for payment within 10 days. Blake pays within 10 days. How does Almond Ltd record the transaction?

Answer:

1. Trade discount of $200 is deducted from the list price and is not recorded. Invoice sent to Blake is for $1,000.
2. 2% settlement discount = $20. Cash received = $980.
3. In the cash book: Debit $980 (bank), $20 (discount allowed column).
4. Double-entry: Debit Bank $980, Debit Discount Allowed $20, Credit Receivables $1,000.

Worked Example 1.2

Nelson Co receives an invoice from a supplier for $500. The terms are 3% settlement discount for payment within 7 days. Nelson pays the supplier $485 within the discount period. Provide the cash book and ledger entries for Nelson Co.

Answer:

1. Payment: $485 (bank), $15 (discount received column).
2. Double-entry: Debit Payables $500, Credit Cash at bank $485, Credit Discount Received $15.

Exam Warning

Do not record trade discounts in the cash book or ledgers. Only settlement (cash) discounts appear in the accounting records at the time of payment.

POSTING FROM THE CASH BOOK TO LEDGER ACCOUNTS

At regular intervals, cash book totals are posted to the general ledger. Discount allowed (total column) is posted as a debit to the Discount Allowed account. Discount received (total column) is credited to the Discount Received account. Totals for cash/bank columns are posted to the Cash or Bank account, receivables, or payables as appropriate.

Summary

The cash book is central to recording receipts and payments. Only settlement (cash) discounts — not trade discounts — are recorded as expenses or income in ledgers, using the discount allowed and discount received columns. Becoming proficient in the double-entry for discounts is essential for accurate accounts and unsurprising results in the ACCA FA1 exam.

Key Point Checklist

This article has covered the following key knowledge points:

• Describe the structure and main uses of the cash book
• Accurately record cash and settlement discounts in the cash book and ledgers
• Distinguish between trade discounts (not recorded) and settlement (cash) discounts (recorded)
• Apply the correct double-entry for discount allowed and received
• Post totals from the cash book to the general ledger accounts
• Avoid common exam errors by separating trade and settlement discounts

Key Terms and Concepts

• cash book
• trade discount
• settlement discount (cash discount)
• discount allowed
• discount received