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Difficulty: Very hardThree-Column Cash Book and Trade/Cash Discounts

A sole trader received a cheque of ₦190,000\text{₦}190,000 from a debtor, Bisi, in full settlement of a debt of ₦200,000\text{₦}200,000, having allowed a 5%5\% cash discount. The transaction was entered correctly in the three-column cash book. Subsequently, the bank returned the cheque marked 'Dishonoured'. To completely write back the cash discount previously allowed upon recording the dishonoured cheque, which ledger account must be credited?

Answer: Discount Allowed Account / Discount Allowed / Discount Allowed A/c / Discount Allowed acc

Answer

Discount Allowed Account
When a customer's cheque is dishonoured, the cash discount previously granted is forfeited. To write back the discount allowed, the debtor's account is debited with the total original liability, the Bank column is credited for the cheque amount, and the Discount Allowed Account in the nominal ledger is credited to reverse the discount expense.

Step-by-Step Solution

1
Determine the original double entry for the settlement transaction in the cash book
Debit Bank column with ₦190,000\text{₦}190,000, debit Discount Allowed column with ₦10,000\text{₦}10,000, and credit Bisi's personal account with ₦200,000\text{₦}200,000.
Cash discount allowed to a debtor is recorded on the debit side of the three-column cash book as an expense.
2
Analyze the impact of a dishonoured cheque on the debtor's obligation and discount entitlement
The settlement is completely voided, restoring Bisi's total debt to ₦200,000\text{₦}200,000.
When a cheque fails to clear, the debtor forfeits the cash discount granted for prompt settlement.
3
Formulate the reversal entries to reinstate the debt and write back the discount
Debit Bisi's personal account with ₦200,000\text{₦}200,000, credit Bank column with ₦190,000\text{₦}190,000, and credit Discount Allowed Account with ₦10,000\text{₦}10,000.
Crediting the Discount Allowed Account reduces the expense account, thereby reversing the discount previously allowed.

Key Concept

Reversal of cash discount allowed on a dishonoured cheque
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Topics

Three-Column Cash Book and Trade/Cash Discounts

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