A warranty is a term in a contract which does not go to the root of the agreement between the parties but simply expresses some lesser obligation, the failure to perform which can give rise to an action for damages, but never to the rights to rescind or repudiate the contract. An affirmation at the time of sale is a warranty provided it appears on the evidence to have been intended. No special form of words is necessary.
“It must be a collateral undertaking forming part of the contract by agreement of the parties express or implied, and must be given during the course of the dealing which leads to the bargain, and should then enter into the bargain as part of it.”
In today’s business world one method of attracting customers is warranties.
A warranty is the seller or manufacturer’s promise to do something for a customer (repair, exchange, refund) about a bad or broken product during a specified time period without additional charges (for free).
Even though warranties represent an uncertainty in time, amount, or customer, they are usually deemed as an obligation and must be recorded in financial statements. The following example deals with warranties and how they are accounted for in the books.