Question

If an employer were to account for a defined benefit pension plan on the cash basis, it would be a violation of the?

1) going-concern assumption
2) accrual concept
3) separate entity concept
4) historical accounting

Answer 1

Accounting for a defined benefit pension plan using cash basis is a violation of the accrual concept, which requires recording expenses when they are incurred. Modern defined contribution plans like 401(k)s are preferred due to their investment flexibility, tax benefits, and portability, helping to protect retirees from inflation.

Step-by-step explanation:

Accounting for a defined benefit pension plan on the cash basis would be a violation of the accrual concept. The accrual basis of accounting requires that expenses be recorded when incurred, not necessarily when cash is paid; thus, pension expenses should be recognized as the employees render the service that entitles them to future benefits. Defined contribution plans like 401(k)s and 403(b)s are more common today, where employers and employees contribute a fixed amount regularly, and the funds are invested in various vehicles, offering tax deferral and portability. These newer plans help retirees avoid the inflation costs that can burden those with traditional pensions.