Provision for warranty formula

Provision for warranty formula

Provision for warranty is normally calculated on the bases of sales made during the period. There are two important formulas for warranty i.e. warranties amount required and warranty to be charged to profit & loss account.

Warranty Amount = % of Warranty x Sales

Warranty Charged = Provision Required- Unused opening Balance

It is important to note that, if there is unused balance of provision, then warranty amount and warranty charged to the profit & loss account will differ. This concept has been explained with an example.

Percentage (%) of Provision

% of provision is decided on the bases of historical data of the provision. The other important factor is industry practice for provision. It is to be noted that provision for warranty should be the best estimate.

Purpose of Provision for Warranty

Provision for repair is expense relates to current year, which will be confirmed next year. Therefore it is appropriate to charge expense in this year.

 Conditions for Provision Creation

There are two primary conditions for provision creation

1.   It is probable that repair will happen

2.   a best estimate of future expenditure can be made

Provision for Warranty Formula Example

Sales (During Year) = 180,000

Warranty= 10%

How much provision is required?

Solution

Warranty = % of Warranty x Sales

= 10% x 180,000

=18,000 (Provision for warranty)

Journal Entry for Provision

Date	Particulars	Debit	Credit
	Repair Expense	18,000
	Provision for Repair		18,000

 Provision for Warranty Formula Example

Sales (During Year) = 200,000

Sales (Next Year)    = 300,000

Warranty= 10%

Actual Repair next Year= 15,000

How much provision is required?

Solution

Warranty = % of Warranty x Sales

= 10% x 200,000

=20,000 (Provision for warranty)

 Journal Entry for Provision for Warranty (First Year)

Date	Particulars	Debit	Credit
	Repair Expense	20,000
	Provision for Repair		20,000

 Journal Entry for Provision for Warranty (Second Year)

Second year, there will be two Journal entries i.e. Charge Expense related to previous year sales and create provision for current year sales.

First Entry

Opening Provision        20,000

Expenses                   (15,000)

Unutilized Balance        5,000

Date	Particulars	Debit	Credit
	Provisions for Repair	15,000
	Cash		15,000

Second Entry

Provision Required                          30,000

Less: Provision Unused balance        (5,000)

Current Provision Created                25,000

Date	Particulars	Debit	Credit
	Repair (Profit & Loss)	25,000
	Provision for repairs		25,000

Total Provision  

     

Unused opening balance                 5,000

Current provision created              25,000

Total provision required                30,000