Bad Debt Expense and Warranty Expense Recognition

Premium

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:

Unlock Premium Content

Upgrade your account to access the full article, downloads, and exercises.

You'll get access to:

  • Access complete tutorials and examples
  • Download source code and resources
  • Follow along with practical exercises
  • Get in-depth explanations