Estimated Warranty Liability: Journal Entries for Warranty Expense and Cash Payment
What is estimated warranty liability and how is it recorded in a company's financial statements?
Understanding Estimated Warranty Liability
Recording Estimated Warranty Expense
To record the estimated warranty expense on July 31 for July sales, the following journal entry is made:
1. Multiply the sales amount by the estimated warranty repair cost percentage: $325,000 x 4.5% = $14,625.
2. Debit the Estimated Warranty Liability account to increase the liability on the balance sheet.
3. Credit the Warranty Expense account to record the expense on the income statement.
Recording Cash Payment
To record the cash payment made on November 11 under the warranty, the following journal entry is made:
1. Since the company made a cash payment under the warranty, we need to record the transaction.
2. Debit the Warranty Expense account to decrease the expense recorded on the income statement.
3. Credit the Cash account to reflect the outflow of cash from the company.
These entries ensure that the estimated warranty expense is recorded accurately and that the cash payment made under the warranty is properly accounted for.