Question

Ch.11 Current Liabilities

Explain the two basic entries for product warranties.

Answer 1

When companies sells products, most of the times they must guarantee for any defects in such sold products. When such defects happen, the company is obliged to make such defects good by either replacing the defective product with a new one or repairing the defective product.

As per the matching concept, the accountant provides for estimated warranty expenses on the sales made during the period, which will be used to pay for warranty claims when the customers approach with such defective products.

Journal Entry for providing warranty expense and recognising the warranty expense payable (liability):

Warranty Expenses A/c..............Dr                                              xxx

        To Estimated Warranty Expenses Payable (Liability)                 xxx

(Being provision for warranty expenses created on the basis of estimation)

When the customer, approaches for warrnaty claim, the company has to provide for such warranty and will record the following transaction:

Journal Entry for recognising the actual warranty expense:

Estimated Warranty Expenses Payable (Liability)                     xxx

       To Repairs A/c                                                                             xxx

       To Inventory A/c                                                                          xxx

       To Wages Payable on Repairs A/c                                             xxx

(Being expenses incurred on repairs or replacement of the defective products, charged to respective accounts)

Repairs / Inventory / Wages Payable on Repairs A/c.......Dr      xxx

        To Cash / Bank A/c                                                                    xxx

(Being expenses incurred, paid via cash or bank)