Write Over Formula Warranty For Free

Warranties are recorded initially as a liability as it meets the definition of unearned revenue or deferred revenue. If the company charged $20 for a 2 warranty, that $20 would be collected at the time of sale. The warranty would then be recognized as revenue evenly over the 2 year period.

A typical warranty agreement should include: Parties involved: It should clearly state the names and contact information of both the manufacturer or seller and the consumer. ... Product or service description: This section needs to provide a detailed description of the product or service covered by the warranty.

Under current GAAP, a warranty is accounted for as a deliverable?a concept similar to a performance obligation? only if it is a ?separately priced extended warranty? or a ?product maintenance? contract. A warranty is considered separately priced if a customer may purchase the product with or without the warranty.

Warranty expense is an expense related to the repair, replacement, or compensation to a user for any product defects. In other words, a vendor or manufacturer is committed to repair or replace a sold product during a certain time period if it breaks or does not function properly ing to the terms of the warranty.

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 revenue is not earned until the earning process is substantially complete in the future. Thus, the $50 received for the extended or separate warranty is initially recorded as ?unearned revenue.? This balance is a liability because the company owes a specified service to the customer.

The key to proper revenue recognition for warranties is to first determine if the warranty provides a service to the customer beyond the required agreed-upon specifications. Next, the seller or company must allocate the price to both the product and separate warranty obligation based on standalone prices.