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Warranties are recorded initially as a liability as it meets the definition of unearned revenue or deferred revenue. If the company charged $20 for a 2 warranty, that $20 would be collected at the time of sale. The warranty would then be recognized as revenue evenly over the 2 year period.

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.

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.