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Use the following steps as a guide to account for warranty expenses: Find the total number of products sold.Determine the percentage of defective products.Calculate the number of products needing replacement.Evaluate the cost of product replacement.Estimate the total warranty expense.

There are two ways to account for these costs: the cash and accrual basis.

Expense Warranty (Accrual) approach if the warranty is inseparable from the product being sold and warranty costs are probable and can be reasonably estimated, accrue these costs as a liability in the year of sale.

C. Under the cash method of accounting, warranty costs are expensed when incurred. On the other hand, under accrual accounting, warranty costs are expensed based on estimates in the year of sale. This ensures the matching and recording of expenses with related revenue in the same period.

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.

Warranty Reserve is a fund maintained by the manufacturer to meet warranty expenses. The warranty reserve balance is the balance left after deductions of claim expenses for the year. The accrual rate is usually a fixed percentage of sales and is managed by the finance department of the company.

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.