How to Account for Warranty Payable at Buffalo Inc?

Understanding Warranty Payable at Buffalo Inc

Buffalo Inc reported sales revenue for 2017 of $906,000, and their products are sold with a nine-month warranty. Members of Buffalo's management estimate that the cost of the warranty will equal up to 6% of sales revenue.

Accounting for Warranty Payable

When it comes to accounting for warranty payable at Buffalo Inc, the company needs to make provisions for estimated warranty claims to be paid out. This is done to ensure that the company has enough funds set aside to cover any potential warranty claims.

In this case, Buffalo Inc would record a debit to the warranty expenses account and a credit to the warranty payable account to reflect the estimated cost of warranty claims based on the sales revenue.

Recording Actual Warranty Claims

When the actual warranty claims are paid out, Buffalo Inc would then debit the warranty payable account and credit the cash or bank account to reflect the actual amount paid out as a result of warranty claims.

By following this accounting process, Buffalo Inc can accurately track and manage their warranty expenses, ensuring that they have the necessary funds available to cover any warranty claims that arise.