Accounting for Warranty Work

[Birken Vogt]

What is the proper/professional way to account for work done under warranty?

For instance the other day I had a no-start condition for a unit I had fixed a couple months back. Go out to find it was a non-conductive fuse in a holder that I had installed on the last trip.

I fixed it and said have a nice day.

But if I was going to run this business like a business I should be accounting for this just like any other repair and have the work order/invoice get paid from an expense category [warranty allowance] instead of an assets category.

But I can see problems with this approach showing income on invoices that are internal warranty that is not really income.

On the other hand it would be handy to have these types of jobs properly accounted in case there is finger pointing between myself, customer, and manufacturer. It would always be best to have a full invoice made out for every job so that the customer can see how much money I covered his behind for if it is covered, and so if manufacturers or vendors feel inclined to cover part of it they can have something to go off.

Thoughts?

 

[Hobbytime]

when I bring my truck to the dealer for warranty work I get an invoice for the amount it would have cost and a " no charge" at the bottom, so it documents what was done and why..any work done for a customer whether free, warranty or billed should be invoiced to keep track of what was done and when..

 

[thepumpguysc]

x2 on Hobbys suggestion.. ALWAYS document any repairs made, weather chargeable or not..

 

[Birken Vogt]

Correct, but when I generate a repair order the money has to be paid from somewhere. Or the books will not balance. Does it come from expenses?

This is more of an accounting question.

The invoice needs to be posted right away or the bookkeeping will get way behind. Sometimes it has to be posted when it is unknown who will be paying it.

When I pay it internally, what account [structure] should that come from?

No cash changes hands. Everything will offset.

edit: my software will not let me pay it with an expense type account as the source. I guess I should make an equity account for this?

 

[Ct Farmer]

When I managed a service firm we job costed everything by cost code assigned to certain job number. Basically everything resulted in a billable (A/R) or an expense (AP) to the job. Service work resulted in an invoice to the customer with a blance due as hours, outisde labor and parts were costed as billable after proper markups. Warranty work was costed as an expense to the job and since nothing was costed as billable a $0 balance invoice resulted. The actual (not, marked up) cost was paid from the general expense account like any other payable. This resulted in us always showing warranty work at cost and not charging ourselves inflated mark up price which would not result in a true accounting of what the job cost us. In some cases parts were out of warranty but labor covered so the customer got an invoice for parts only. If a vendor covered parts under warranty we only charged the job for expenses not reimbursed by the vendor. For example - a part swapped by the vendor only results in labor for us so no parts costed to the job. Even years after we could charge to a job as our warranty was out as far as 10 years on some parts.

The whole point of this was to at anytime in the future run a report on a job and get a true accounting of income vs expense. We could also, by selecting a report of the warranty cost code get a printout of all warranty work in the time frame selected. We had 2 bookkeepers and a temp in the 12 years I was there and nobody said it was wrong to do this way. We used Peachtree.

Several accountants, an IRS audit and required fiancial reports on gov't jobs found no problems with it - if they even noticed I have no idea.

 

[Birken Vogt]

I am not quite up to speed on all that you have said there but it sounds good so far.

One problem is I do not track by job or any of that.

One thing that is coming to mind is that I am using cash based accounting. All the stuff I am reading seems to assume accural. I will probably change company structure in the near future so I guess the time to switch to accrual has arrived.

 

[Birken Vogt]

One other thing I would like to point out where my thinking comes from. Most of my warranty work is to consumer machines so they would like to see what gets done and I would like to show them what it is worth rather than what it costs.

I came from the trucking industry and this is the way they did it there. If you had a truck that needed a warranty repair you would take it to the OE shop and discuss with the service guys. They would always make you sign promising to pay because it was still technically the manufacturer's discretion whether they would cover. They were a franchise. Even if you and they both knew good and well it was covered.

They would do the repair and 90% of the time it would come back with a bill for say $5000 in repairs done and then a payment line from the mfr. for the same and balance due = 0.

The other 10% of the time there would be some disagreement over who should pay and then the bosses would fight over that.

Also when you are taking the phone call and the customer says it does not run, you have no idea whether it is because some part you installed broke, or if they broke the air filter off and filled the engine with dust and let the oil run out.

Also as stated above sometimes one thing is covered and another is not, or the customer asks for an oil change or some other repairs while you are there and then payment comes from different sources. But it is all on one original invoice and the ultimate responsibility lies with the owner and others "may" cover "at their option" as it always says in the warranty paperwork.

 

[Ct Farmer]

We worked on a cash basis also. The service order that our techs generated showed the work done by item. Some may have been billable, some warranty, maybe even contract work. The tech would break out their tome on their tome sheet by work done. This in turn generated a bill for the customer for only what they needed to pay for.

If we wanted (rarely) to show the customer the 'value' of the work they got we would figure it as a billable job and then credit the account for the same amount getting a $0 balance. Perhaps you could find a way to do this with your software?

What software are you using?

 

[John C.]

I work in Quickbooks Pro. I made a Warranty category and would make the chargeable customer my company. Parts and labor went on that bill at the internal rates and notes were put at the bottom explaining the issue. Reports at the end of each quarter would then show what happened. No matter how you look at it a warranty is an internal charge coming out of your pocket. You could split the charges into any other account you want, IE cost of sales, policy allowance, training and so on.

Separate billable invoices could be generated and time split anyway on claims that were that have negotiated splits. I don't warrant parts so billed the comeback jobs to the customer and returned credits as the parts suppliers refunded any charges for failed parts.

 

[GrainBinMan]

What is the proper/professional way to account for work done under warranty?

For instance the other day I had a no-start condition for a unit I had fixed a couple months back. Go out to find it was a non-conductive fuse in a holder that I had installed on the last trip.

I fixed it and said have a nice day.

But if I was going to run this business like a business I should be accounting for this just like any other repair and have the work order/invoice get paid from an expense category [warranty allowance] instead of an assets category.

But I can see problems with this approach showing income on invoices that are internal warranty that is not really income.

On the other hand it would be handy to have these types of jobs properly accounted in case there is finger pointing between myself, customer, and manufacturer. It would always be best to have a full invoice made out for every job so that the customer can see how much money I covered his behind for if it is covered, and so if manufacturers or vendors feel inclined to cover part of it they can have something to go off.

Thoughts?

We use the Enterprise version of Quickbooks 14.0. If we have a warranty deal, we make up an invoice to the customer, just like always. That does two things. It takes your parts out of inventory, and keeps that straight. The second thing is the customer can see what this would have cost them if you weren't so kind as to give them the warranty deal.

Then on that invoice, at the bottom of the list of items and/or labor that we used, we add a line item that we call WARRANTY, NO CHARGE. Then we manually fill in whatever negative amount we are giving the customer credit for.

Beings this is all setup in Quickbooks, I'm not 100% sure how the expense/income accounts are setup. The WARRANTY, NO CHARGE item, shows up in my list of inventory items. It is classified as an 'Other Charge' type of account. At the end of the year (or whenever) we can pull up a report that shows how much we had to 'give away'.