Whatever the cost is, debit warranty cost in cost of goods sold and credit warranty reserve on your balance sheet. Then put the dollar value of the warranty cost in a savings account. (Debit the savings account and credit your operating account).
If there is a warranty claim, then debit warranty reserve for amount of the claim and credit warranty revenue for the same amount. The warranty expense should match the warranty revenue so the gross profit is zero.
For example, assume that equipment material cost is $10,000.
Warranty reserve is 2% or $200.
Cost of Goods Sold – warranty expense $200
Warranty Reserve $200
Warranty claim of $150 is submitted.
Warranty reserve $150
Warranty revenue $150
The profit and loss statement would look like:
Warranty Revenue $150
Warranty Cost of Goods Sold $150
Gross Profit $0
There is still $50 in warranty reserve to cover any additional warranty claims.
$200 might not seem like a lot of money. However, multiply the $200 times the number of projects you perform in a year and the warranty reserve and your savings account should be a lot more than $200. You won’t get a warranty claim on every project. You will be prepared to handle the few warranty expenses you do incur.
Did you check your bank accounts online today? This is the first step in protecting your hard-earned cash.
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Ruth King is well known as “The Profitability Master.” She is passionate about helping small business owners become profitable and stay profitable. For over 40 years she has coached, trained, and helped contractors and others achieve the business growth and goals they wanted to achieve.
Contact Ruth by emailing ruthking@hvacchannel.tv.
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