Your Ask Joey ™ Answer

What is the journal entry to record warranty expense

Warranty expense is recorded in the same period that the sale occurs. There is no standard way to estimate total warranty expense, so management should either use historical data to derive the figure or use a defensible method to deriving an estimate.

As the visual below illustrates, warranty expense is recorded by debiting warranty expense and crediting accrued warranty.

Back To All Questions

You might also be interested in...

  • 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.

  • 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.