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Q: Accounting Cycle ( No Answer,   1 Comment )
Subject: Accounting Cycle
Category: Reference, Education and News > Homework Help
Asked by: wrussell-ga
List Price: $5.00
Posted: 18 Dec 2005 12:18 PST
Expires: 17 Jan 2006 12:18 PST
Question ID: 607148
Why do contingent liabilities that must be accrued in the accounting
records often involve warranties?
There is no answer at this time.

Subject: Re: Accounting Cycle
From: myoarin-ga on 18 Dec 2005 12:35 PST
What is a warranty:

"In a broad sense, an agreement or undertaking by a seller to be
responsible for present or future losses of the purchaser occasioned
by deficiency or defect in the quality, condition or quantity of the
thing sold. In a stricter sense, the provision or provisions in a
deed, lease or other instrument conveying or transferring an estate or
interest in real estate under which the seller becomes liable to the
purchaser for defects in or encumbrances on the title. (See Title

So the seller has a contingent liability that he will be called upon
to repair or replace faulty goods sold.  Doing so will be an expense
in a future accounting period resulting from sales in the reporting
and/or earlier account periods, depending on the period of his
warranties.  So if he doubles sales, he must anticipate a
proportionally higher contingent liability; or if he introduces a new
product, he may expect some higher calls for repairs  - e.g., a new
auto model.

This may not be the textbook explanation, but I hope it helps.

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