Product warranty
In one sentenceThe seller's or manufacturer's obligation to repair, replace, or refund a product if a defect appears within an agreed period or one imposed by law.
Simply put
A warranty reassures the buyer, but it is a future cost to the seller. So do not wait for the customer to come back: at the end of each period, estimate what you will spend on repairs for the sales you made, and record a warranty provision.
If the warranty is merely an assurance that the product is sound, it is a provision under IAS 37; if it is an extended warranty sold separately, it is a service, and part of its revenue is deferred under IFRS 15.
Worked example
An appliance store sold appliances for 2,000,000 SAR, and its experience estimates that repairs under warranty cost 2% of sales (a hypothetical rate for illustration).
Sales2,000,000 SAR
Warranty provision: 2,000,000 × 2%40,000 SAR
Dr. Warranty expense40,000
Cr. Warranty provision40,000
Warranty provision at the end of the period40,000 SAR
Don't confuse it with
Letter of guaranteeA letter of guarantee is a bank's undertaking to pay on behalf of its customer, while the warranty here is the seller's obligation for its product.