What is a warranty liability and when should it be recorded in the financial statements?
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. Once actual warranty expenses are incurred, the liability will be reduced in the firm’s books.
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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 […]
What is a warranty?
A warranty is a written contract between the seller (or original manufacturer) and buyer to repair or replace the item for a specified period of time. Each warranty contract will explicitly say what type of issues are covered. For example, if the warranty was on a car, it would not cover and damage that was […]
What is the journal entry to initially record a warranty?
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.