Display Equation Warranty For Free

Warranty as a percentage of sales may vary from 0.5% to 5% of sales for different industries. This metric will help companies easily define the impact of warranty on company's bottom line.

A warranty is a guarantee issued by a seller to a buyer that a product will meet certain specifications. If the product does not meet those specifications, the buyer can ask the manufacturer or seller to correct the problem. Certain exceptions apply, and not every defect is covered.

Example of a Warranty Liability ABC Company sells blue widgets. It has historically experienced a warranty expense of 0.1% of sales. In the current period, it sold $500,000 of blue widgets, so it records a debit of $500 to the warranty expense account and $500 to the warranty liability account.

By my calculations, a product with a 1 year warranty will be covered for 1 year. 1=1. Or 1 year=12 months=365 days=8760 hours. One with a 90 day warranty will be covered for 90 days.

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 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.

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.

Using the percentage of products needing replacement, determine the total number of products you expect to repair or replace. Multiply the percent by the total number of products your company sells within the current warranty period.

How to calculate 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.

Therefore, a company must record in the period of the sale the estimated cost of repairing or replacing the product during the warranty period. That expected cost is recorded as a liability on its balance sheet and as an expense on its income statement.