Bad Debt Expense and Warranty Expense Recognition
A bad debt is a consequence of making a sale on credit. A warranty is a promise by a manufacturer or seller to ensure the quality or performance of the product for a specific period of time. Both bad debt and warranty are uncertain future costs arising as a consequence of making sales. The firms are required to estimate the bad debt expense and warranty expense and record these estimated expenses when the products are sold (matching principle). An equivalent liability is created.
Warranty Expense xx
Estimated Warranty Liability xx
When the costs are incurred, (usually in subsequent periods), the expense is charged to the warranty liability:
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