Order Equation Warranty For Free

Using the percentage of products needing replacement, determine the total number of products you expect to repair or replace. Multiply the percent by the total number of products your company sells within the current warranty period.

Example of Product Warranty Liability If the manufacturer sells 5,000 cars in the first month of its accounting year, the manufacturer must debit Warranty Expense for $5,000,000 (5,000 cars X $1,000)and will credit Warranty Liability for $5,000,000.

Warranties will create a liability account when the costs are probable and if the cost of the warranty can be reasonably estimated. Warranty liabilities will thus, be considered contingent liabilities. Warranty expenses should be matched and recorded in the same period as their corresponding warranty revenues earned.

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.

This means that it cannot be included under COGS. If the service is provided under an extended warranty, its costs will be classed under cost of revenue. If it's provided under a standard warranty, it will probably be classed under operating expenses (OPEX).

Create a Warranty Liability Account: When a sale is made, the company sets up a warranty liability account on the balance sheet to represent its estimated future obligations.

To estimate the warranty expense for a company, we need to know three main things: Number of units sold during a particular accounting period. Percentage of the sold products that will probably need a repair or a replacement based on previous experiences. Average cost of repairing or replacing products under warranty.