Ask Joey ™ a Question

How is a warranty accounted for under revenue recognition rules?

Warranties can either be purchased separately or will result as a component of the sale of an inventory item. If the warranty is purchased separately from the inventory (an additional purchase), they will need to be accounted for accordingly. If the warranty is purchased separately from inventory, it should be considered a separate service or item. This will be recorded by the issuer of the warranty as a separate obligation (liability).

However, if the warranty cannot be purchased separately, it will not be considered a separate obligation. Often times, companies will offer customers assurance that the product or services that they are purchasing will work or be delivered as understood.

For example, if a company sold a product for $100 and it includes a 2 year warranty that has a value of $20, the company would recognize $80 of revenue and $20 would be recorded to unearned warranty revenue. The warranty revenue would then be recognized over the 2-year period.


You might also be interested in...

  • What is economies of scale?

    Economies of scale illustrate the advantages companies are able to realize from increasing their volume or output. For example, if the fixed cost to operate in the automotive industry is $100,000, then producing 100 cars instead of 5 cars represents a lower fixed cost per unit and overall cost per unit. Due to the higher […]

  • What is the law of supply and demand?

    The law of supply and the law of demand are two separate laws that work together to determine the optimal price point of a product (rather than the market as a whole). As a general rule, if price increases, then supply will increase, and demand will decrease. If price decreases, then demand will increase, and […]

  • Types of elasticity measures in supply and demand?

    To understand elasticity measures, you will need to have a solid understanding of the law of supply and demand. In short, the law of supply and demand says that a price increase will increase supply and decrease consumer demand, but a price decrease will decrease supply and increase demand. Aside from changes in price, there […]