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What is the journal entry for recording warranty claims paid?

When a product is sold that has a warranty attached, the company records the warranty expense and warranty liability in the same period. There is no cash outflow when the initial warranty liability is recorded. The cash outflow typically occurs at a later date.

When the cash outflow occurs, the debit is to accrued warranty and the credit is to cash. There is no income statement impact when the warranty claim is paid.

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  • 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.

  • 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.

  • 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 caused by the buyer (i.e. a crash). However, if the transmission or stereo stopped working, then that may be covered. Warranties typically have a time or volume component. So back to the car example, a car warranty might last for 5 years or 50,000 miles. Once that threshold is hit, the warranty is no longer in place and the seller is off the hook for any future issues.