When a seller provides a warranty, an estimate is required to be recorded in the seller's liability account. This entry must reflect expected expense related to fulfilling warranty obligations by the company.
Example:
Company ABC sells a TV $200 and $10 one year extra warranty for that TV. The following entries would be made:
Dr. Cash $210
Dr. COGS $200
Cr. Revenue $200
Cr. Inventory $200
Cr. Warranty Provision $10
In a subsequent year, if a warranty claim was made the entry would be:
Dr. Warranty Provision $10
Cr. Warranty Repairs Expense $10
In a subsequent year, if warranty claim was not made the entry would be:
Cr. Warranty Provision $10
Dr. Warranty Revenue $10