Defined Contribution Plan Accounting

Defined Contribution Plan Accounting

In this article we would explain the defined contribution plan accounting. Defined contribution plan is a type of post employment benefits that paid on the retirement. Post retirement benefits includes pension, medical care etc. These benefits can be classified into following

a)    Defined Contribution plan.

b)   Defined Benefit Plan.

Defined Contribution Plan Accounting Treatment

Entity shall make a fixed contribution into a fund created for the purpose. The entity shall not be liable to pay any further contribution, in case funds assets are not sufficient to pay employee benefits. Some important characteristics of defined contribution plans are

a)    Contributions are fixed to a fund.

b)   Entity is only responsible for making the contribution.

c)    Entity is not responsible to make contribution toward shortfall.

d)   Pension payment is the responsibility of fund.

e)    Pension is not pre determined.

f)     Pension of employee depends on the size of the fund.

Defined Contribution plan Accounting

In Defined contribution plan, the contributions made are charged as expenses. There may be there possible situation.

a)    Contribution paid.

b)   Unpaid Contribution.

c)    Prepaid Contribution.

Contribution paid Journal Entry

Contribution by the company is an expenses for the company, therefore expense is debit and cash is credit.

Date	Particulars	Dr.	Cr.
	Contribution a/c	$ 60,000
	Cash  a/c		$ 60,000

Contribution unpaid Journal Entry

In case of unpaid contribution, the contribution is recorded as liability. It means the expense is debited and liability is credited.

Date	Particulars	Dr.	Cr.
	Contribution a/c	$ 60,000
	Contribution payable a/c		$ 60,000

Prepaid Contribution Journal Entry

Sometime company makes advance contribution to the fund, in this case prepaid contribution is debit, and cash is credit.

Date	Particulars	Dr.	Cr.
	Prepaid Contribution	$ 60,000
	Cash a/c		$ 60,000