TYPES OF DISCOUNTS

Subject: 

ACCOUNTING

Term:

FIRST TERM

Week:

WEEK 8

Class:

SS 1

Topic:

TYPES OF DISCOUNTS

Behavioural objectives:

At the end of the lesson, the learners will be able to

  • explain the meaning of discounts
  • identify various types of discounts
  • explain the types of discounts in accounts
  • distinguish between cash discount and trade discount.

 

Previous lesson: 

The pupils have previous knowledge of

CORRECTION OF ERRORS

that was taught as a topic in the previous lesson

 

 

Instructional Materials:

  • Wall charts
  • Pictures
  • Related Online Video
  • Flash Cards
  • Receipts
  • Invoice

 

 

Methods of Teaching:

  • Class Discussion
  • Group Discussion
  • Asking Questions
  • Explanation
  • Role Modelling
  • Role Delegation

 

Reference Materials:

  • Scheme of Work
  • Online Information
  • Textbooks
  • Workbooks

 

 

CONTENT 

Discount

What is a Discount?

A discount can be defined as the reduction in the price of goods in order to encourage or motivate the customer to purchase in bulk or for prompt payment. Discount accounts are nominal accounts. On the debit side the discount is allowed and, on the credit, side is the discount received.

Types of Discounts

  1. Trade Discount
  2. Cash Discount

Trade Discount

This is an allowance made by a manufacturer or wholesaler to a retailer in the form of deduction from the catalogue price of goods supplied. It is an inducement to the customer to buy goods in large quantities.

Cash discount

A cash discount is a percentage allowance for prompt payment of an account or for payment within a specified period of time. It is not ignored in the account as in the case of trade discount

Classification of Cash Discount

Discount Received: This is the discount granted to customers by suppliers when they pay for its accounts quickly. It is treated as an income and credited to the three- column cash book. Cash discount is posted to the income side of the profit and loss account.

Discount allowed: This is a discount allowed by a firm to its customers when they pay their accounts quickly. It is entered on the debit side of the three-column cash book and is treated as expenses in the profit and loss account.

Comparison between Cash Discount and Trade Discount

S/N CASH DISCOUNT TRADE DISCOUNT

  1. It is given for prompt payment. It is given to encourage or induce purchase of large quantities of goods.
  2. A discount will be posted to the ledger. Discount will not be posted to the ledger.
  3. It must be deducted after a trade discount. It will be deducted before the cash discount.
  4. It is given to customers who pay on time. It is given to every buyer.
  5. It is conditional. It is unconditional.

ILLUSTRATION:

Mr. SUCCESS made the following transactions in the month of March, post the transactions in a three – column cash book:

March 1. Cash at hand ₦200

Cash in bank ₦2,000

Withdrawal of office cash ₦300

Customer R. Adelai settle his account of N200 by cash and was allowed 5% discount

4 Paid wages by cheque ₦700

5 Received cheque from R.Winla ₦1,160

Allowed him discount ₦10

5 Purchase of goods less 5% discount

(Discount received) by cash ₦400

6 Paid T. Chike by cheque ₦280

Discount received ₦20

6 Bought packaging materials for cash ₦200

7 Cash sales ₦3,000

7 Paid into bank ₦2,800

What was the balance brought down on 7th Mar, 2013?

SUCCESS’S THREE COLUMN CASH BOOK FOR MARCH 2013

DR CR

Date Particulars Folio Disct. Allowed ₦ Cash ₦ Bank ₦ Date Particulars Folio Disct. Received ₦ Cash Bank

Mar. 1 Balance b/d 200 2,000 Mar. 2 Office Cash 300

Mar. 2 Bank 300 Mar. 4 Wages 700

Mar. 2 R. Adelai 10 190 Mar. 5 Purchases 20 380

Mar. 5 R. Winla 40 1160 Mar. 6 T. Chike 20 280

Mar. 7 Sales 3000 Mar. 6 Packing mat. 20

Mar. 7 Bank

Cash cc 2,800 Mar. 7 Bal c/d cc 2,800

Mar. 7 490 4,680

50 3,690 5,960 40 4,500 8,000

Oct. 1 Bal b/d 490 4,680

DR Office A/c CR

Date Particulars Amount ₦ Date Particulars Amount ₦

Mar. 2 Bank 300

DR Bank A/c CR

Date Particulars Amount ₦ Date Particulars Amount ₦

Mar. 2 Bank 300

DR R. Adelai A/c CR

Date Particulars Amount ₦ Date Particulars Amount ₦

Apr. 1 Balance c/d 200 Mar. 2 Cash 190

Mar. 2 Discount 10

DR Wages A/c CR

Date Particulars Amount ₦ Date Particulars Amount ₦

Mar. 4 Bank 700

DR R. Winla A/c CR

Date Particulars Amount ₦ Date Particulars Amount ₦

Apr. 1 Balance b/d 1,200 Mar. 5 Bank 1,160

Mar. 5 Discount 40

1, 200 1, 200

DR Purchase A/c CR

Date Particulars Amount ₦ Date Particulars Amount ₦

Mar. 5 Cash 380 Apr. 1 Balance c/d 400

Mar. 5 Discount 20

400 400

DR T. Chike A/c CR

Date Particulars Amount ₦ Date Particulars Amount ₦

Mar. 6 Bank 280 Apr. 1 Balance c/d 300

Mar. 6 Discount 20

300 300

DR P Mat A/c CR

Date Particulars Amount ₦ Date Particulars Amount ₦

Mar. 6 Cash 20

DR Sales A/c CR

Date Particulars Amount ₦ Date Particulars Amount ₦

Mar. 7 Cash 800

DR Disct. R A/c CR

Date Particulars Amount ₦ Date Particulars Amount ₦

Mar. 5 Purchases 20 Apr. 1 Balance c/d 40

Mar. 6 T. Chike 20

40 40

DR Disct. A A/c CR

Date Particulars Amount ₦ Date Particulars Amount ₦

Mar. 2 R. Adelai 10

Mar. 5 R. Winla 40

DR Cash A/c CR

Date Particulars Amount ₦ Date Particulars Amount ₦

Mar. 7 Cash 2,800

 

Analytical Petty cash Book

The petty cash book is the book for recording small disbursements. i.e. expenses. Petty cash is the book of original or prime entry which is used for recording small disbursements or expenses.

Imprest System

It is a system for recording petty cash transactions, which are paid out of a cash float. The system is set up by giving a specified sum known as cash float to the cashier in order to cover petty expenses during the period.

The petty cashier will pay out money from the float for all authorized vouchers. At frequent intervals, he/she will be re-reimbursed for the amount spent thus bringing it to the original amount.

Columns in a Petty Cash Book

(A) DEBIT SIDE

  1. Amount
  2. Dates
  3. Particulars of expenses
  4. Voucher number
  5. Total amounts

 

(B) CREDIT SIDE

On the credit side we have the analysis of expenses of a ledger account. This has different columns for different expenses e.g. stationery, postage, transport, etc.

Recording of Receipts and Payments in Petty Cash Book

The credit entry is made in the cash book

The debt entry is made in the petty cash book

The entries on the credit side of the petty cash book are first made in the total column and then, extended into the relevant expenses column,

The expenses columns have various headings for different expenses,

The last column of the petty cash book is known as a ledger account.

Preparation of a Petty Cash Book

Example

Record the following in the relevant columns of the petty cash book of Chillington, a sole proprietor.

Jan 1. Petty cashier received an Imprest amount of ₦2000

2 Paid for bus fare ₦200

4 Paid for postage ₦150

8 Paid for duplicating paper ₦300

12 Bought envelops ₦250

16 Paid Mr. Kalu ₦500

25 Bought office pins ₦100

26 Bought stamps ₦100

30 Paid taxi fare ₦200

Petty Cash Transactions in Ledgers

Chillington’s Petty Cash Book

The above table is a petty cash book.

Petty Cash Transactions in Ledgers

DR Stationery A/c CR

Date Particulars Amount ₦ Date Particulars Amount ₦

Jan Petty cash 300

DR Postage A/c CR

Date Particulars Amount ₦ Date Particulars Amount ₦

Jan Petty cash 300

DR Transport A/c CR

Date Particulars Amount ₦ Date Particulars Amount ₦

Jan Petty cash 400

DR Office Expenses A/c CR

Date Particulars Amount ₦ Date Particulars Amount ₦

Jan Petty cash 100

DR Mr. Kalu’s A/c CR

Date Particulars Amount ₦ Date Particulars Amount ₦

Jan Petty cash 500

Imprest System

This is a method used in controlling the amount of money given to the petty cashier. A fixed amount called Imp rest is given to the cashier weekly or monthly to pay for small expenses.

At the end of the period, the petty cashier gives account of what she spends and the balance remaining. The amount spent will be reimbursed. This process of giving a petty cashier some amount of money for petty items at the beginning of every month is called “Imprest system”.

The sum of money giving to a petty cashier is called “Cash float”, the document used in raising petty cash is known as a “Petty Cash Voucher”

Petty Cash

This is a small amount of discretionary funds in the form of cash used for expenditures where it is not sensible to make any disbursement by cheque, because of the inconvenience and costs of writing, signing and then cashing the cheque.

 

EVALUATION

  1. BASI LIMITED operates a petty cash on the imprest system with a cash float of N3000

Jan.1 envelope ₦40

Jan.5 petrol ₦160

Jan.7 postage stamps ₦70

Jan.9 petrol ₦180

Jan.9 envelopes ₦120

Jan.11 office cleaning ₦20

Jan.11 stationery ₦210

Jan.12 travelling expenses ₦100

Jan. 13 transport fee ₦90

Jan.16 postage stamps ₦30

Jan. 17 paid Gracious ₦90

Jan.20 stationery ₦120

Jan.21 petrol ₦50

Jan.21 settled Ojo ₦70

Jan.22 travelling expenses ₦60

Jan.22 office cleaning ₦100

Jan.25 postage ₦40

Jan. 28 paid Eije ₦50

Jan. 30 travelling ₦80

You are required to enter the transactions into the pretty cash book under the following headings: postage and stationary, Motor expenses, transport, office cleaning,

  1. What is a Petty Cash Book?
  2. Define Imprest System

You are required to post the above entries to a single column cash book.

BANK RECONCILIATION STATEMENT

CONTENT

Introduction to Bank Documents

Definition of Bank Statement

Meaning of Bank Reconciliation Statement

Causes of Discrepancies/Disagreement between Cash Book and Bank Statement

Interpretation of Bank Statements

Introduction to Bank Documents

It is normal for businessmen to be interested in knowing his balances of cash in hand and bank at the end of the month. The bank also checks the customer’s account with it to know the customer’s worth at the end of each month. While customer prepares cash book to show the required balances the bank prepares a bank statement. The usual practice is that, bank debits all cheques that are credited to the cash book because they reduce the amount of money in the customer’s credit and credit all cheques that are debited to the cash book because they work to increase the customer’s credit in it (bank).

Definition of Bank Statement

Bank Statement is a document prepared periodically and sent by the bank to a current account holder showing the transactions between the customer and the bank within a period of time usually a month.

Meaning of Bank Reconciliation Statement

This is a statement that is prepared by a current account holder for the purpose of finding out the differences or discrepancies between the cash book and bank statement balances.

Causes of Discrepancies/Disagreement between Cash Book and Bank Statement

Unpresented Cheques

Uncredited Cheques

Dividend

Standing order

Dishonoured cheques

Credit transfer

Bank charges

Direct debit

Undercast and overcast

  1. Unpresented Cheques: These are cheques drawn or issued out in favour of somebody but have not been drawn from the bank at the time of preparation of the bank statement.
  2. Uncredited Cheques: These are cheques received and entered on the debit side of the cash book and lodged in the bank but have not been entered in the credit side of the customer’s bank statement as at the date of reconciliation.
  3. Standing order: This is an instruction giving by the account holder to the bank to make regular payment on his behalf. The bank will make the payment and debit the bank statement but no entry in the cash book. e.g. insurance, water bill etc.
  4. Dishonoured cheques: These are cheques lodged or deposited into a bank but were rejected by the bank due to certain irregularities.

The possible reasons why bank dishonor cheques are:

Irregularity in signature

Insufficient funds in the account

Alteration of the cheque

Disparity between amount in words and figure

Post-dated cheque

Stale cheque

  1. Credit transfer: These are cheques or cash received directly by the bank on behalf of the firm, without notifying the firm until they receives the bank statement.
  2. Bank charges and interest: It is an amount deducted by the bank (bank charges) for service rendered to customers. The bank charge customer’s account based on the following reasons:

Cheques issued

Particular account (current)

Service rendered

Purchase of forms etc

  1. Direct debit: This is an arrangement whereby a person’s account is debited with a sum of money at the instance of supplier with the account owner prior permission.
  2. Dividend: This is part of profit distributed to shareholder of an organization. This will be paid into the account of the owner directly.
  3. Undercast and overcast: When either there is under cast and overcast of payment or receipt by the cashier will also cause disagreement between the bank and the cash book.

EVALUATION

What is a bank statement?

Define bank reconciliation statement

List the causes of discrepancies between a cash book and a bank statement, explain any five of them.

Interpretation of Bank Statements

Treatment of Bank Reconciliation

Starting with the balance as per Cash Book

Starting with the balance as per Bank Statement

Adjustment of the cash Book and preparation of Bank reconciliation Statement

 

METHOD 1: Starting with Cash balance:

When the Cash book balance is used, Unpresented cheques, credit transfer and dividend are added while uncredited cheques, bank charges, standing order, dishonoured cheque are deducted.

EXAMPLE 1: FORMAT on Balance as per Cash Book

₦ ₦

Balance as per Cash Book × × ×

Add:

Unpresented cheque × × ×

Dividend × × ×

Credit transfer × × × × × ×

× × ×

Less:

Uncredited cheques × × ×

Bank charges × × ×

Dishonoured cheques × × ×

Standing order × × × × × ×

Balance as per bank statement × × ×

EXAMPLE 2: FORMAT On Balance as per Bank Statement

₦ ₦

Balance as per Bank Statement × × ×

Add:

Uncredited cheques × × ×

Bank charges × × ×

Dishonoured cheques × × ×

Standing order × × × × × ×

× × ×

Less:

Unpresented cheques × × ×

Dividend × × ×

Credit transfer × × × × × ×

Balance as per Cash Book × × ×

ILLUSTRATION 1:

On 31st January 2013, BABA’s cash book showed a debit balance of N5, 000.00. His bank statement showed the balance of N5, 990.00. On comparison the following were found:

Cheque issue amounting to N 2,500 had not been presented for payment.

The bank reject a cheque amounting to N150.00

Standing order of N120.00 to a club was not taken into consideration.

A customer, Ayo paid N180.00 directly into the bank without any notice to the firm

Bank charges of N170.00 were entered in thebank statement only

A dividend of N250.00 was paid directly into the bank and not recorded in the cash book

Cheques for N1,500.00 were entered into the cash book and paid to the bank but had not been cleared thus not credited

You are required to prepare the bank reconciliation statement for the month of January 2013

Suggested solution:

Bank Reconciliation Statement as at 31st January, 2013

₦ ₦

Balance as per Cash Book 5,000.00

Add:

Unpresented cheques 2,500.00

Dividend 250.00

Credit transfer (Ayo) 180.00 2,930.00

7,930.00

Less:

Uncredited cheques 1,500.00

Standing order 120.00

Bank charges 170.00

Dishonoured cheques 150.00 1,940.00

Balance as per Bank Statement 5,990.00

Bank Reconciliation Statement as at 31st January, 2013

₦ ₦

Balance as per Bank Statement 5,990.00

Add:

Uncredited cheques 1,500.00

Bank charges 170.00

Dishonoured cheques 150.00

Standing order 120.00 1,940.00

7,930.00

Less:

Unpresented cheques 2,500.00

Dividend 250.00

Credit transfer 180.00 2,930.00

Balance as per Cash Book 5,000.00

Comprehensive Format of Bank Reconciliation Statement

₦ ₦

Balance as per Cash Book XOX

Add

Unpresented cheques XOX

Dividend XOX

Interest received XOX

Credit transfer XOX

Receipt Uvercast XOX

Payment Overcast XOX XOX

XOX

Less

Uncredited cheques XOX

Bank charges XOX

Interest payment XOX

Standing order XOX

Dishonoured cheques XOX

Payment Undercast XOX

Receipts Overcast XOX

Direct debits XOX XOX

Balance as per Bank Statement XOX

Preparation of Adjusted Cash Book

The cash book will be adjusted before the bank reconciliation statement is prepared. Here is the format:

Adjusted Cash Book

DR CR

₦ ₦

Balance b/d XOX Bank charges XOX

Payment overcast XOX Interest payment XOX

Credit transfer XOX Standing order XOX

Dividend XOX Dishonoured cheque XOX

Receipt undercast XOX Receipt overcast XOX

Interest received XOX Payment undercast XOX

Balance c/d XOX Direct debits XOX

XOX XOX

Balance b/d XOX

ILLUSTRATION 2:

Given below are the cash book (bank Column only) and the Bank statement of E. Kaka for the month of 31st June, 2013.

DR CR

Date Particulars Folio Cash Date Particulars Folio Cash

₦ ₦

Jun. 1 Bal. b/f 5,000 Jun. 2 J. Mama 3,000

7 Jack .B 1,200 9 Rita .C 2,500

18 Bat. J 900 15 A.A Ali 500

24 S. Onuchu 1,200 21 Matins D. 2,000

29 C. Okoro 3,200 30 Abu .H 2,200

31 Balance c/d 700 31 Peter .O 2,000

12,200 12,200

Balance b/d 700

BANK STATEMENT SENT E.Kaka ON 31ST JUNE, 2013

DATE PARTICULARS DR CR BALANCE

₦ ₦

Jun. 1 Balance b/f 5,000.00

7 J. Mama 3,000.00 2,000.00

11 Jack .B 1,200.00 3,200.00

24 Matins.D 2,000.00 1,200.00

31 Abu .H 2,200.00 -1,000.00

31 Bat. J 900 -100

31 Bank charges 50 -150

31 Jack. B (cheque Dishonoured) 1,200.00 -1,350.00

Required

Amend and balance E. Kaka’s cash book (bank column only) and reconcile this with her bank statement.

 

SUGGESTED SOLUTION:

Bracket in the bank statement and credit balance in the cash book (bank columns) represent overdrafts. Brackets generally represent negative values in accounting.

E. KAKA’S ADJUSTED CASH BOOK (BANK COLUMN ONLY) 31ST JUNE,2013

PARTICULARS ₦ PARTICULARS ₦

Balance c/d 1,950.00 Balance b/f 700

Bank charges 50

Jack. B (Dishonoured Cheques) 1,200.00

1,950.00 1,950.00

Balance b/d 1,950.00

E. KAKA’S BANK RECONCILIATION STATEMENT (31ST JUNE, 2013)

₦ ₦

Balance as per Cash Book (1,950.00)

Add:

Unpresented Cheques:

Rita C 2,500.00

A A. Ali 500.00

Peter. O 2,000.00 5,000.00

3,050.00

Less:

Uncredited Cheques:

S. Onuchu 1,200.00

C. Okoro 3,200.00 4,400.00

Balance as per Cash Book (1,350.00)

Note: We may as well get the above result by removing the bracket and reversing the order of reconciliation as follows:

E. KAKA’S BANK RECONCILIATION STATEMENT (31ST JUNE, 2013)

₦ ₦

Balance as per statement (overdraft) 1,350.00 OD

Add

Uncredited cheques

S. Onuchu 1,200.00

C. Okoro 3,200.00 4,400.00

3,050.00

Less

Unpresented Cheques:

Rita C 2,500.00

A. A. Ali 500.00

Peter O. 2,000.00 5,000.00

Balance as per Cash Book