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Hello and welcome to the session discussing guarantee and warranty costs. A warranty is a promise made by a seller to a buyer to make the buyer whole in case of product deficiency. This assurance is provided by the retailer or manufacturer to encourage purchases. Guarantee and warranty costs are treated separately in accounting due to their importance in the matching principle. This principle ensures costs are matched with related revenues. For example, if a retailer sells a product for $10,000 in year one, the costs related to guarantee and warranty are matched to that revenue.
