Operate Footnote Warranty For Free

Warranty is provided on an item to establish trust and it works as a marketing tool to attract buyers, thus making it a part and parcel of every business. Hence, warranty is the future expense of a manufacturer which he may or may not incur.

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 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.

NSCA responds: We suggest carrying this cost as overhead, which allows you to close out the project sooner. When you close the job out as soon as possible, you can carry the time billed toward warranty as a line item on your profit and loss statement.

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.

In essence, warranty expense is a provision or reserve that the company sets aside to meet its future obligations related to product warranties. This expense is a liability on the balance sheet and an operating expense on the income statement.

Under current GAAP, a warranty is accounted for as a deliverable?a concept similar to a performance obligation? only if it is a ?separately priced extended warranty? or a ?product maintenance? contract. A warranty is considered separately priced if a customer may purchase the product with or without the warranty.