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Two types of current liabilities that must be estimated

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Describe these two types of current liabilities that must be estimated and explain why they must be estimated. How are the financial statements affected if they are not estimated?

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Solution Summary

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Your tutorial is 417 words plus four references and gives examples to illustrate these two liability account and what would happen if you didn't accrue them.

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Warranty Expenses

When a firm sells a product and offers a warranty on parts and/or service, they have incurred a liability for future services as part of the sale. They don't know how many of the products will break but they must estimate the services that may be rendered over warranty period so that the warranty expense occurs in the same period as the sale (matching concept). Thus, there is an estimated current liability related to warranty obligations, usually called "Reserve for Warranty Repairs" or something similar.

If the organization waited until the exact amount was known, it would be understating the obligations in the period of the sale and it would be failing to match the expenses with the revenues of the period. So, some current liabilities ...

Solution provided by:
Carol Sargent, PhD
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  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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