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Warranty expense is an expense related to the repair, replacement, or compensation to a user for any product defects. In other words, a vendor or manufacturer is committed to repair or replace a sold product during a certain time period if it breaks or does not function properly ing to the terms of the warranty.

Warranty expense is an example of a situation when taxes payable are greater than income tax expense because on the income statement statment estimated warranty expense is deductible and on the tax return only actual warranty expenses are deductible.

If it's provided under a standard warranty, it will probably be classed under operating expenses (OPEX). Operating expenses are often referred to as sales, general and administrative expenses, as these tend to be the main line items in this section of the profit and loss account.

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.

Generally, there is no specified duration for implied warranties under state laws. However, the state statutes of limitations for breach of either an express or an implied warranty are generally four years from date of purchase.

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.

Warranty expense is recorded in the same period that the sale occurs. There is no standard way to estimate total warranty expense, so management should either use historical data to derive the figure or use a defensible method to deriving an estimate.