Question

What is Pension Cost? What is the accounting treatment of pension cost

Answer 1

Sol:

A pension is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments. A pension may be a "defined benefit plan", where a fixed sum is paid regularly to a person, or a "defined contribution plan", under which a fixed sum is invested that then becomes available at retirement age. Pension expense is the amount that a business charges to expense in relation to its liabilities for pensions payable to employees. The amount of this expense varies, depending upon whether the underlying pension is a defined benefit plan or a defined contribution plan. The expense that a company incurs each year by providing a pension plan for its employees. Major expenses in the pension cost include employer matching contributions, management fees, and so forth.

How a pension works

Pension plan are best summarized in a diagram. The following diagram shows three major players: the employer, the employee, and the pension trust.

A pension trust is a legal entity that holds the pension investments and disburses the funds later, when necessary. Trusts are managed by the trustees who are independent of the company. Examine several relationship below.

Accounting treatment of Pension Cost

Types of Pension	Accounting treatment
Defined Contribution Plan Journal Entry DR Pension Expense CR Cash	Defined Benefit Plan Journal Entry To record company contribution to pension DR Defined Benefit Pension Liability CR Cash To record pension expense DR Pension expense CR defined benefit pension liability To Adjust pension liability DR Other Comprehensive Income CR Net Defined Benefit Liability