How to Record Warranty Costs in Accounting

Understanding Warranty Costs in Accounting

Warranty costs are estimated at 3% of monthly sales, which amount to $15,900 in this case. When warranties are honored with replacement products and no defective products are returned during the month, the company needs to record a journal entry to account for the estimated warranty payable.

Journal Entry

The journal entry to record warranty costs involves debiting the Warranty Expense account and crediting the Estimated Warranty Payable account. In this scenario, the journal entry would be as follows:

Warranty Expense $15,900

To Estimated Warranty Payable $15,900

Explanation

The debit to the Warranty Expense account reflects the increase in expenditure due to honoring warranties with replacement products. On the other hand, the credit to the Estimated Warranty Payable account signifies the increase in liabilities attributed to the estimated warranty costs.

The computation to arrive at the $15,900 warranty cost is done by multiplying the monthly sales by the estimated percentage, which is 3% in this case. By recording this journal entry, the company accurately reflects its financial position by recognizing the future obligation of warrantied products.