Selling extended warranties at the counter
Whether a shop should sell extended warranties on appliances and electronics, and how to treat the money for multi-year cover in its books.
By Achekam · · 5 min read · For Retail businesses in South Africa, Nigeria, Kenya
The customer has chosen the fridge, the salesperson has rung it up, and then comes the question at the counter: would you like to add an extended warranty? For an appliance or electronics shop, those few seconds can add a welcome slice of income to the sale. They also create a promise the shop may have to keep for years.
Before a shop starts selling extended cover, or if it already does, it helps to be clear about two things. What exactly is it promising, and how should the money for a promise that runs for several years appear in this month's figures? This article takes each in turn.
Three kinds of warranty
Investopedia explains that there are two general types of warranty. Express warranties are given in writing, verbally, in advertising, on the product or by other means. Implied warranties promise that a product works as designed without anyone needing to say so. A third, the extended warranty, is something the customer buys: Investopedia describes it as like insurance paid for in advance, usually extending cover several years beyond the manufacturer's warranty.
| Type | Where it comes from | Does the customer pay for it? |
|---|---|---|
| Express | The manufacturer's or shop's stated terms | Included in the price |
| Implied | Arises from the sale itself | Included in the price |
| Extended | A separate agreement sold at or after the sale | Yes, as an extra |
Customers often confuse the three. A clear sentence from the salesperson about what the manufacturer already covers, and what the extended warranty adds, avoids an argument a year later. South African shops should also know the return rights consumer law gives buyers on its own terms; see section 20 returns.
What warranties usually leave out
Investopedia explains that warranties typically apply only to products that have not been altered or modified after purchase, and are unlikely to be honoured where the product failed because of the owner's actions rather than a design or manufacturing fault.
Write the exclusions into the extended warranty terms in plain language, and make sure staff can explain them. Typical ones for a shop selling appliances and electronics:
- the product has been opened, modified or repaired by someone else;
- damage from dropping, liquid, power surges or misuse;
- wear and tear on consumable parts;
- use for commercial purposes when the cover was sold for home use.
If the shop sells a warranty underwritten by a third party, the third party's terms govern, and the shop should know them as well as its own.
When a customer disputes a warranty claim
Investopedia lists steps for resolving a warranty dispute: review the warranty terms, contact the seller or manufacturer, gather documentation including proof of purchase, follow up, and escalate to consumer protection agencies or seek legal advice if it remains unresolved. Read from the shop's side, that list tells you what the customer will do, and what you should have ready:
- Your warranty terms, as the customer received them.
- The original till receipt showing the product and the warranty sold.
- A record of the claim: when it came in, what the fault was, and what the shop's technician found.
- A written answer to the customer explaining the decision by reference to the terms.
A shop that can produce those four quickly settles most disputes before they reach a consumer body. Investopedia's guide to warranties covers express and implied warranties, why claims are denied and how disputes are resolved.
Money for a promise not yet kept
Here is the accounting problem. A customer pays today for three years of cover. If the shop counts the whole amount as income today, this month looks better than it is, and the next three years carry the cost of claims with none of the income.
Investopedia explains that when an upfront payment is received, the business records cash, an asset, and deferred revenue, a liability, then moves a portion into revenue as it delivers, for example each month for an ongoing subscription. Its examples of deferred revenue include annual software subscriptions paid upfront, event tickets sold months in advance, prepaid insurance premiums and gift card sales. An extended warranty sold by the shop itself fits naturally alongside those.
If the warranty is a third party's product and the shop only earns a commission for selling it, the picture is different, and the shop should agree the treatment with its accountant before the first sale.
Moving the warranty into deferred revenue in Achekam
At the till, every sale that reaches the server posts a balanced journal in the same step, with each payment method to its own account, revenue, output VAT, and cost of sales against inventory at the product's cost price. Revenue goes to the revenue account (4000). So a warranty rung up at the till lands in revenue along with the fridge.
The correction is a month-end routine:
- Set up the accounts. Each business has its own double-entry ledger with a standard chart of accounts, and accounts can be added, renamed or switched off. Add a liability account for deferred warranty revenue and an income account for warranty revenue earned.
- Move this month's warranty sales out of revenue. Total the warranty lines sold in the month, excluding VAT, and post a manual journal debiting revenue and crediting deferred warranty revenue. The output VAT the till posted is not part of this journal; confirm the VAT treatment with your accountant.
- Release the earned share. Each month, post a journal moving the portion of each warranty's cover that has now passed from deferred warranty revenue to warranty revenue earned.
- Keep a schedule. A simple spreadsheet of each warranty sold, its price, start date and cover period supports both journals.
A business can post manual journals; an unbalanced journal or one dated in a closed month is refused, and a posted journal is corrected only by a reversal. Post the deferral before the month is closed. How till sales reach the ledger in the first place is covered in till sales in the ledger.
Look at last month's till sales, total the extended warranties sold, and decide with your accountant whether they belong in this year's income or in a liability that unwinds over the cover period.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
