When is warranty expense recorded

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Article by Madhuri Thakur. What is the Warranty Expense? There are 3 essential aspects which should be known while recording the warranty expense journal entry: The number of units of product sold during the time period we require to record? The percentage of products sold which are expected to be repaired or replaced? It is based on prior experience and shall be an estimate. The average cost of replacements or repair under warranty? Example Let us consider the below example for a better understanding.

Leave a Reply Cancel reply Your email address will not be published. These expenses hold more relevance in the case of manufacturing units where warranty expenses are more common and impact the business bottom line. Warranty expenses are always estimates and it is highly probable that actual expenses to satisfy warranty claims may not be the same requiring certain adjustments by the business.

This is a guide to Warranty Expense. Here we also discuss the definition and how to calculate warranty expense? You may also have a look at the following articles to learn more —. Submit Next Question. By signing up, you agree to our Terms of Use and Privacy Policy. Forgot Password? All projectors sold come with a two year warranty, in which Star Digital Systems will replace or repair the projector should it stop working as intended.

Keep in mind that this liability treatment is only necessary for companies that have to consistently repair or replace their products. By doing so, the financial statements most accurately represent all costs associated with product sales, and therefore indicate the true profitability associated with those sales. If the period covered by the warranty is changed by management, this will alter the warranty expense not only for those sales in the current period, but also for sales in prior periods whose warranties have now been extended into the current period.

If the cost of warranty claims were to instead be recognized only when the company processes actual claims from customers, the costs may not be recognized until several months after the associated sales. The financial reporting under this approach would yield inordinately high initial profits, followed by depressed profits in later months, for as long as the warranty period lasts.

If there is no information from which to derive a warranty estimate for use in an accrual, consider using industry information about warranty claims. This is especially useful when other products in the industry are similar to those sold by the company. If the amount of warranty expense recorded is significant, expect the company's auditors to investigate it.