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The Corporate Finance Institute Accounting
Warranties
When companies issue warranties, it is a guarantee that its products
will be free from defects for a specified period of time. When
manufacturers offer warranties, the warranty obligation is recorded as
a provision for warranty payable or a warranty liability account. Once
these warranty obligations have been performed, they are reduced in
the liability account.
Example
In 2017, XYZ Company sold $100 million in cars and provides a 3-year
warranty on each car. The company estimates that 4% of total sales will
equal to warranty obligations. In 2018, the company met $900,000 of its
warranty obligations or $500,000 for parts and $400,000 for labor.
2017
DR Warranty Expense: 4,000,000
CR Warranty Payable: 4,000,000
2018
DR Warranty Payable: 900,000
CR Inventory: 500,000
CR Wages Payable: 400,000
Unearned Revenues
Unearned revenues, also referred to as deferred revenues, are non-
financial obligations that arise from the collection of assets that have
not yet been earned. For example, if a company were to receive cash
before their services have actually been provided, these would be a
form of unearned revenue. Once the goods are delivered/service is
provided, the revenue can be recognized.
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