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This session discusses guarantee and warranty costs, explaining that a warranty is a promise made by a seller to a buyer to assure the quality, quantity, or performance of a product. Retailers or manufacturers provide warranties to encourage buyers to purchase items. Guarantee and warranty costs are treated separately in accounting due to their importance in the matching principle. This principle ensures that expenses are matched with the revenues they generate. For example, if a retailer makes a sale in year one, the warranty cost associated with that sale should be recorded in the same period to match expenses with revenues.
