Warranty Liability

There are two ways of recognizing warranty costs - cash basis and accrual basis. Under cash basis, you charge warranty costs to expense as you incur them and there is no balance sheet impact.

If you use accrual basis, you can accrue these costs and charge them to operating expense in the year of sale, if it is likely that customers will make warranty claims relating to your goods or services and if you can reasonably estimate the costs that will be incurred. The credit side of that entry will be to Estimated Warranty Liability on the balance sheet.

Learn how to analyze a balance sheet in terms of company's liquidity and solvency using financial ratios such as the current ratio, quick (or acid) ratio, debt to asset ratio and debt to equity ratio.