Every business has a warranty or claim policy under which a business promises to its customers that it will repair or replace the defective or broken goods within a certain period of time that may span over years, months or days. It is better for a company to estimate the number of expected claims so that it can accrue the future expense regarding these claims and warranties regarding the cost of expected claims or warranties.
However the accrual accounting of the expected claims must be done in the same accounting period under which the products were sold. This will help in creating flawless financial statements that will accurately depict the entire cost related to the products sold in that accounting period. if the warranty period is changed on the decision of the management the warranty expense will also change and all the alterations must be done not only to the current period but to the period prior to current period for which the period has been extended as a current period.
In some cases the companies don’t recognize the cost of warranty claims prior to the actual occurrence of the claims and are processed until and unless the customer files actual claim. However in such cases it may happen that the cost of the claim may not be recognize for several months after the sales. This approach may lead to depressed profits in the later months of sales as the company is not recognizing the claim expense and calculating high initial profit. If the span of warranty claim is expanded over more than a year then it is divided in two kinds of liability one that is the short term liability and has to be paid within a year and the other is the long term liability that has to be paid in the next year.
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