Warranty Obligations
Estimated Product Warranty Costs
When products are sold with warranties, companies estimate future repair or replacement costs and recognize both warranty expense and a warranty liability in the same period as the related sales revenue.
- Estimated using historical experience.
- Recognized when the product is sold.
- Liability decreases as claims are honored.
- Applies regardless of when customers file warranty claims.
Tip
Warranty accounting is a classic application of the matching principle and appears frequently on the CPA FAR exam.
Summary
Warranty liabilities recognize expected future costs associated with current-period sales.