USA Journal Entry for maintenance reserve fund

[Kee]

I sell products online and sell warranties too. I want to set up a reserve account on my balance sheet for a reserve fund in case I have to service these warranties in the future. Is the account a balance sheet asset or liability?

Also, can someone tell me the journal entry method to move a portion of the revenue I make from selling a warranty to that account. For example, lets say I sell a warranty for $50, and I want to set aside $10 in a reserve account.

Would it be debit to Revenue on the P&L and credit Warranty Reserve as a balance sheet asset?

 

[kirby]

The reserve account is a liability.

So after you sell a warranty for $50, you want to set aside $10 in reserve.

DR Provision for Warranty Service (an expense account) $10
CR Reserve for Warranty Service ( a balance sheet liability account) $10



And so you add to the reserve account with each warranty sale
Note that you have to keep track of the warranties you sell because at some point the warranty period expires and then you can take the unused reserve related to that one to income

So say that your first warranty expires unused after 1 year - It was sold for $15

DR Reserve for Warranty Service $15
CR Expired Warranty Income $15


Also let's say you had to spend $25 cash on a warranty service. At this point assume your Warranty Reserve has a $1,000 credit balance

DR Reserve for Warranty Service $25
CR Cash $25

Finally if you ever see that the Reserve Account has a DEBIT balance then you need to do the first entry above to adjust it.

For example you start business with only selling one $12 warranty and have to then spend $25 to fix a warranty problem. At this point your reserve account has a DEBIT balance of $13.
So you have to record an entry like the first entry above for $13 to remove the Debit balance in the reserve account.