How to Record Warranty Expense in Accounting
What should Fish Nets, Inc. do regarding the warranty expense?
In May, Fish Nets, Inc. sold 8,000 nets with a three-month warranty for $10 each on account. Fish Nets estimates that warranty costs will be approximately $100 on these sales. The actual warranty cost for the sales made in May was $30 in June and $50 in July. Fish Nets should ________.
a. Record a warranty expense of $30 in May
b. Record a warranty expense of $50 in June
c. Record a warranty expense of $100 in May
d. Record a warranty expense of $150 in July
Answer:
Fish Nets, Inc. should record a warranty expense of $100 in May.
When dealing with warranty expenses in accounting, it is important to match the expenses with the revenue recognized from the sales. In this case, Fish Nets, Inc. estimated the warranty costs to be approximately $100 for the 8,000 nets sold in May.
The company should record the estimated warranty expense in the same period when the sales occurred, which is in May. This practice aligns with the matching principle in accounting, ensuring that expenses are recognized in the same period as the revenues they relate to.
Even though the actual warranty costs of $30 in June and $50 in July were lower than the estimated $100, they should not be recorded as additional expenses in those months. The initial estimated expense of $100 in May already accounted for the warranty costs associated with the sales made.
By recording the warranty expense of $100 in May, Fish Nets, Inc. accurately reflects the costs related to the sales made in that month. This approach maintains the integrity of the financial statements and ensures proper matching of expenses with revenues.