2. Entry is made as in method 1 above, but the discount column is used in finding the cash balance. Where, as sometimes happens, the net cash column is omitted, the true receipts can be found only by subtracting the amount of the discount from the other column totals.
The closing summary for the columnar cash book, explained in [Chapter XIX], shows one method of handling the discount column total. While all other summary entries for the cash receipts are credits, the discount summary is a debit. Because of this fact, the discount total is sometimes shown on the disbursements side of the cash book among the summary entries of the other columns, in which case the word “contra” is written after the words “Sales Discount,” showing that the amount has come from the discount column on the opposite page. Similarly for the Purchases Discount.
The only advantage of this method is to bring all summary debit postings on one side of the cash book and all credits on the other. Where the cash book is operated according to method 2, the closing summaries are made as shown in [Form 42], using columns on the debit side for Customers, Sales Discount, and Sundry; and on the credit side for Creditors, Purchases Discount, and Sundry. As there is no net cash column, the totals for Customers and Creditors are not all cash. To clear them of their non-cash elements, the discounts can be subtracted from their respective Customers’ and Creditors’ totals, and only the net brought over into the Sundry columns; or the subtraction can be effected by adding the discounts to the opposite side. The use of a Net Cash column simplifies the summarization of the cash book and should always be employed. Treatment 2 is shown only because it is sometimes met with in practice.
Securing Information as to Neglected Discounts.—Some accountants have pointed out the desirability of bringing before a manager or proprietor the cost of his failure to take advantage of discounts offered him. To show this cost the following method of entering a purchase has been suggested:
| Purchases | 100.00 | ||
| Purchases Discount | 5.00 | ||
| Vendor | 105.00 | ||
The net amount of the bill is thus charged to Purchases, the discount offered to Purchases Discount, and the Vendor is credited with the billed amount. When payment is made on any of the optional bases offered, entry is made as follows:
| (1) Vendor | 105.00 | ||
| Cash | 105.00 | ||
| or | |||
| (2) Vendor | 105.00 | ||
| Cash | 103.00 | ||
| Purchases Discount | 2.00 | ||
Form 42. Discount Columns Used for Cash Balance
(Method No. 2)
In the case of entry (1), the net result of the whole purchase transaction is a loss or expense of the amount in Purchases Discount, because of failure to take the discount. In entry (2), if the best option is taken, viz., the entire 5%, Purchases Discount shows no balance; any less favorable option, say 2%, results in a debit balance in Purchases Discount of 3%, measuring the expense incurred through failure to take the best option. Unquestionably, the information given a manager by this Purchases Discount debit balance will claim his notice and immediate attention.