What is the journal entry to record a warranty liability?
When a company offers a warranty on a product, the warranty should be accrued for at the time the product is sold. There is not right or wrong way to estimate the potential liability associated with offering a warranty. Let’s assume that Tahoe Ventures estimated a potential liability of $1,000,000 related to recent sales.
To record the liability, the company would debit warranty expense and credit accrued warranty, which is a liability on the balance sheet. The purpose of this is to record the cost of the warranty in the same period that the revenue is recognized.
When a customer actually makes a warranty claim, which could be a year or two later, the company would debit accrued warranty liability and credit cash.
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