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Definition: Warranty expense is the cost associated with a vendor or manufacturer's commitment to repair or replace a product, should it not perform as intended during a specified period of time. In other words, it's the cost of repairing or replacing defective products after they have been sold to customers.

To calculate the warranty expense, first figure out how many products will need repair or replacement: Total number of units sold X Percentage of units that are defective. Units needing repair or replacement X cost per unit to repair or replace. 14 water bottles x $4 per water bottle = $56 cost of inventory.

5 Basic Types Of Warranties On Cars. The five most common types of warranties on cars are bumper-to-bumper, powertrain, corrosion, emissions control, and accessory warranties. These generally come included with your new vehicle and last for your first few years of ownership.

An extended warranty price represents a percentage of the total product cost. As a general rule of thumb, you shouldn't spend more than 30% of the product cost on a product warranty.

This measure calculates the total value of warranty claims paid in the 12-month period as a percentage of total business entity revenue for the period. A warranty claim is a claim by a customer/product owner for a product under warranty, and usually entails either repair or replacement.

The Equipment Warranties account would be considered a current asset because its benefits will be used up within the next twelve months. If the warranty were for 18 months, 12 months' cost would be considered a current asset and 6 months' cost would be a long-term asset.

If the defective product needs to be repaired or refunded, the cost incurred reduces the liability account. Warranty expense is recognized in the same period as revenue for the sold products if there is a probability that an expense will be incurred and if the company can estimate the amount of the expense.