Get Appendix G Common Errors - Lawcustoms

Recording Warranty Expense If a company provides a warranty on the product, they should repair or replace it if it's defective. It creates a liability when the particular product is sold as the company has a liability, which starts when the product is sold.

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 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.

What is a Warranty Letter? A warranty letter is a powerful document that serves as a written guarantee from the supplier or manufacturer to the buyer. It outlines the terms and conditions of the warranty, including what is covered, how long it lasts, and any exclusions or limitations.

Warranty costs appear in the statement of cash flows when there is an actual payment of cash to settle the claims of the customers. It is considered as part of cash outflows under the operating section of the statement of cash flows.

Warranty liability is usually classified as current liabilities in the balance sheet but if the warranty coverage extends beyond the financial year then the company is required to split this liability between current and non-current sections of the position statement of an organization.

Clarify what the warranty does and does not cover. Be specific when writing out exactly what the warranty does and does not cover. For example, if your product malfunctions, write out whether you will pay for new parts, as well as labor. Do customers have to go to you for repairs, or can they use outside vendors?