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Warranties will create a liability account when the costs are probable and if the cost of the warranty can be reasonably estimated. Warranty liabilities will thus, be considered contingent liabilities. Warranty expenses should be matched and recorded in the same period as their corresponding warranty revenues earned.

A warranty is a contingent liability, so the party providing it should record a liability and warranty expense when it records the associated sale of goods or services. As the selling party incurs actual warranty costs, it charges them against the liability account.

Warranty revenue recognition: Types of Warranties On the other hand, service warranties are separate performance obligations because the seller provides distinct services beyond guaranteeing that the product will function as specified.

Warranties are classified in two categories: assurance- and service-type. An assurance-type warranty guarantees that the product will function as intended. This type of warranty promises to repair or replace a delivered good or service if it does not perform as expected.

Warranties provide a guarantee about the condition of goods and services purchased, providing an assurance that they are as advertised. They are generally only good for a specified period. When that period ends, the issuing entity is no longer obligated to repair or replace a product previously covered.

This is How to Calculate Warranty Liability Costs Number Of Units (or Service Contracts Sold) Produced Per Period. Cost Per Unit. Expected Number of Warranty Claims in a Period. Use number as a percentage, i.e., 2% is 2. Cost Per Warranty Claim.

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.