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The provision of warranty support, however, is not directly connected to the production of the item. This means that it cannot be included under COGS. If the service is provided under an extended warranty, its costs will be classed under cost of revenue.

This measure calculates the amount of revenue that is set aside to pay warranty claims in the 12-month period as a percentage of total business entity revenue for the period.

In accounting terms, the warranty is a liability and is carried on the balance sheet as “warranties payable.” For example, suppose a manufacturer of washing machines estimates that 5 percent of sales revenue will be needed to pay for repairs under warranty in the coming year.

Accrue the warranty expense with a debit to the warranty expense account and a credit to the warranty liability account. As actual warranty claims are received, debit the warranty liability account and credit the inventory account for the cost of the replacement parts and products sent to customers.

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.

Warranty Expense Recognition While recording the event in the financial statements, the company will debit (charge) the warranty expense account and credit (accrue) a liability account when the product is sold to a client.

To estimate the warranty expense for a company, we need to know three main things: Number of units sold during a particular accounting period. Percentage of the sold products that will probably need a repair or a replacement based on previous experiences. Average cost of repairing or replacing products under warranty.

If the company can reasonably estimate the amount of warranty claims likely to arise under the policy, it should accrue an expense that reflects the cost of these anticipated claims. The accrual should take place in the same reporting period in which the related product sales are recorded.

The provision of warranty support, however, is not directly connected to the production of the item. This means that it cannot be included under COGS. If the service is provided under an extended warranty, its costs will be classed under cost of revenue.

This measure calculates the amount of revenue that is set aside to pay warranty claims in the 12-month period as a percentage of total business entity revenue for the period.

In accounting terms, the warranty is a liability and is carried on the balance sheet as “warranties payable.” For example, suppose a manufacturer of washing machines estimates that 5 percent of sales revenue will be needed to pay for repairs under warranty in the coming year.

Accrue the warranty expense with a debit to the warranty expense account and a credit to the warranty liability account. As actual warranty claims are received, debit the warranty liability account and credit the inventory account for the cost of the replacement parts and products sent to customers.

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.

Warranty Expense Recognition While recording the event in the financial statements, the company will debit (charge) the warranty expense account and credit (accrue) a liability account when the product is sold to a client.

To estimate the warranty expense for a company, we need to know three main things: Number of units sold during a particular accounting period. Percentage of the sold products that will probably need a repair or a replacement based on previous experiences. Average cost of repairing or replacing products under warranty.

If the company can reasonably estimate the amount of warranty claims likely to arise under the policy, it should accrue an expense that reflects the cost of these anticipated claims. The accrual should take place in the same reporting period in which the related product sales are recorded.