Which type of accounting is most relevant for disability income plans that require the insurer to match premium income with expected benefit payments over time?

• A. Cash-basis accounting
• B. Tax accounting
• C. Accrual accounting
• D. Managerial accounting

Answer: (C)

Verified step by step guidance

1. Understand the concept of accrual accounting: Accrual accounting is a method where revenues and expenses are recorded when they are earned or incurred, regardless of when cash is received or paid. This is particularly useful for matching income and expenses over time.
2. Analyze the requirements of disability income plans: These plans require insurers to match premium income (revenue) with expected benefit payments (expenses) over time, ensuring that financial statements accurately reflect the financial position and performance.
3. Compare accrual accounting with other methods: Cash-basis accounting records transactions only when cash is exchanged, which may not align income and expenses over time. Tax accounting focuses on compliance with tax laws, and managerial accounting is used for internal decision-making rather than external reporting.
4. Determine why accrual accounting is most relevant: Accrual accounting allows insurers to recognize premium income as it is earned and match it with the expected benefit payments, providing a clear and accurate representation of financial obligations and resources over time.
5. Conclude that accrual accounting is the correct choice: It ensures that the financial statements reflect the true financial position of the insurer by aligning income and expenses in the same reporting period, which is essential for disability income plans.