Classify Formula Warranty For Free

Recording Warranty Expense If a company provides a warranty on the product, they should repair or replace it if it's defective. It creates a liability when the particular product is sold as the company has a liability, which starts when the product is sold.

Answer and Explanation: A warranty goes on the liability section of a balance sheet. However, the warranty can fall under current liabilities or long term liabilities sections depending on whether the warranty duration exceeds one year.

Warranty is provided on an item to establish trust and it works as a marketing tool to attract buyers, thus making it a part and parcel of every business. Hence, warranty is the future expense of a manufacturer which he may or may not incur.

What is a Warranty Provision? A warranty provision is an obligation created in the financial statements by manufacturers offering warranties. This provision includes an estimation of the warranty claims that the seller expects to materialize. As stated above, estimating the value may not be as straightforward.

There are two general types of warranties, expressed and implied. Each category has different sub-types of warranties, with terms, conditions, and guarantees. Warranty terms can vary from free repairs on the defective product to complete replacement.

Accrue the warranty expense with a debit to the warranty expense account and a credit to the warranty liability account. As actual warranty claims are received, debit the warranty liability account and credit the inventory account for the cost of the replacement parts and products sent to customers.

A warranty expense refers to the cost that a company anticipates incurring for the replacement or repair of products customers purchase. Companies account for warranty expenses only during the established warranty period. After the warranty period expires, companies cease to incur the warranty expense.

To record the liability, the company would debit warranty expense and credit accrued warranty, which is a liability on the balance sheet. The purpose of this is to record the cost of the warranty in the same period that the revenue is recognized.

In accounting jargon, the assurance-type warranty is an example of a contingent that is both probable and can be estimated. Therefore, a company must record in the period of the sale the estimated cost of repairing or replacing the product during the warranty period.

Accrue the warranty expense with a debit to the warranty expense account and a credit to the warranty liability account. As actual warranty claims are received, debit the warranty liability account and credit the inventory account for the cost of the replacement parts and products sent to customers.