Collate Equation Warranty For Free

Divide the amount of your actual warranty claims in the most recent year by your total sales in the same year to calculate your warranty claims as a percentage of sales. For example, if you had $1,600 in warranty claims and $80,000 in sales, divide $1,600 by $80,000.

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.

To calculate the warranty expense, first figure out how many products will need repair or replacement: Total number of units sold X Percentage of units that are defective. Units needing repair or replacement X cost per unit to repair or replace. 14 water bottles x $4 per water bottle = $56 cost of inventory.

The main use of warranty liability is in a company's accounts, specifically its balance sheet. It is an attempt to take account of the fact that a company may incur future expenses related to goods it has already sold.

The additional warranty expense in the income statement would reduce overall net income. However, if actual warranty claims are significantly lower than estimated warranty claims (i.e. warranty claims are overstated), then that means there warranty liability is overstated.

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.

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.