Question

He need to create an estimated warranty liability arises from the ________ principle.

a) Accrual

b) Cash basis

c) Matching

d) Revenue recognition

Answer 1

The creation of an estimated warranty liability is based on the matching principle of accounting, which aligns expenses with the revenues they helped produce. The correct option is C.

Step-by-step explanation:

The estimated warranty liability arises from the matching principle. This accounting principle dictates that expenses should be recognized in the same period as the revenues they helped to generate.

In the case of product sales with warranties, the cost of providing these warranties should be estimated and recorded as an expense in the same period that the revenue from the sale of the product is recognized.

This ensures that the financial statements accurately reflect the costs associated with the revenues of that period, providing a better understanding of the company's financial performance.