Recording Maintenance Plans and Warranties
by Angela
(London, ON, Canada)
Bookkeeping Entries for Warranties
What would the entry be to record payments received from customers for providing a one year, product maintenance plan/warranties?
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)
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