Recording Maintenance Plans and Warranties

by Angela
(London, ON, Canada)

Bookkeeping Entries for Warranties

Bookkeeping Entries for Warranties

What would the entry be to record payments received from customers for providing a one year, product maintenance plan/warranties?

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Hi Angela,

I haven't done a lot with warranties, so I had to refer to my reference book, The Encyclopedia of Journal Entries published by the AIPB. (It is available for sale on their website.)

The encyclopedia shows it is a 2 step transaction.

Step One - To record the sale of the warranty requires you defer the revenue because it has not been earned yet ... which creates a liability:

DEBIT Cash in Bank (current asset on the balance sheet)

CREDIT Unearned Warranty Revenue (current liability on the balance sheet as you said this is a one year warranty)

Step two - Recognize the revenue on a straight-line basis over the life of the contract, which is one year in this instance. Therefore each month book 1/12th of the warranty amount as follows:

DEBIT Unearned Warranty Revenue (current liability on the balance sheet)

CREDIT Warranty Revenue (Income account on the P&L)

Next step - If a claim is made on the warranty, record the following:

DEBIT Warranty Expense (Expense account on the P&L)

CREDIT Materials and Parts (COGS)

CREDIT Wages Payable (Current liability on the balance sheet)

CREDIT Other Accounts as needed

CREDIT Cash in Bank (current asset on the balance sheet)

P.S. I would like to remind you there is a difference between information and advice. The general information provided in this post or on my site should not be construed as advice. You should not act or rely on this information without engaging professional advice specific to your situation prior to using this site content for any reason whatsoever.

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