The term 'Warranty Expense' represents the anticipated cost that a company expects to incur to meet warranty obligations promised to customers when selling products or services. This expense is typically estimated based on historical data of warranty claims and the estimated cost of repairs, replacements, or refunds required to address customer claims.
For example, if a company provides a one-year warranty on electronic gadgets and expects 5% of units will require repairs or replacement during this period, it calculates warranty expense as a percentage of the revenue from product sales. This calculated amount is recognized in the company's income statement as an expense to match revenue and associated costs as per the matching principle of accounting.
Understanding and appropriately recognizing warranty expenses are crucial for maintaining accurate financial reporting and ensuring compliance with accounting standards. Related terms are Accruals and Contingent Liability as these are also used in context with warranty provisions.