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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.

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.

Clarify what the warranty does and does not cover. Be specific when writing out exactly what the warranty does and does not cover. For example, if your product malfunctions, write out whether you will pay for new parts, as well as labor. Do customers have to go to you for repairs, or can they use outside vendors?

Warranty expense is recognized in the same period as revenue for the sold products if there is a probability that an expense will be incurred and if the company can estimate the amount of the expense.

Additionally, companies record warranty expenses as debits to warranty expense accounts and as credits to liability accounts. When replacing a product, a company would deduct from both the inventory and liability accounts, as the replacement would come from the company's product inventory.

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.

If you have multiple categories, mention the list of products and what warranty period exists for each. An example can be: The Warranty Period for Physical Goods purchased from My Company is 180 days from the date of purchase.