12RQ - Horngren'S Financial And Managerial Accounting

Question

When do businesses record warranty expenses, and why?

Step-by-Step Solution

Answer

Warranty expense is recorded at the time of making sales. It is recorded at the time of sales due to the matching principle.

Step 1: Warranty

A warranty is a kind of agreement that makes a guarantee against any defects in a company’s product. It is an expense for the company and a benefit for the customer. Warranty expense is related to the after-sale service. 

Step 2: Recording warranty expense

Accounting for warranty expenses is based on the matching principle. Warranty expense is recorded at the time of making sales as warranty payable. This warranty expense is recorded based on estimation. When a company makes sales, it is estimated that some of its products would be claimed for warranty. Based on that estimation warranty expense is determined.