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Hello all,
A quick question –
Once a business has recognised at period end the need to create a provision for warranty repairs for example –
I.e :
DR Warranty Expense
CR ProvisionIt is my current understanding that this provision will then carry forward to the next accounting period on the balance sheet based on an estimate of what the next years warranty repairs expense will be.
Is the provision account then adjusted throughout the current year when an actual warranty expense occurs during the year ie materials for repairs?
For example –
DR Provision
CR Bank (or payables).Thanks,
JackYou are basing provision on expected costs in future based on this year’s sales. So in future year you would have Cr Bank Dr warranty expense (p+l current year). However, since this relates to goods sold in previous years, for which provision has been made another entry of Dr provision (relating to warranty expense) Cr P+ L should be made. Hope this helps.
I see.
Thank you for your help I completely understand.
What would be the need though for an adjusting entry?
Why could you not just CR Bank and DR provisions straight away if you know that warranty expense relates to sales from the previous period?
Thanks.
It is probably a similar reason as why you can’t just give balancing figure for someone that is both a creditor and debtor of a company. The warranty expense is a current expense even though related to previous years transactions. Easier to see with provision for decommissioning or potential legal judgement against company. Hope this helps.
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