Final answer:
An estimated warranty liability is created based on the matching principle, which requires expenses to be recorded in the period that revenues are earned.
Step-by-step explanation:
The need to create an estimated warranty liability arises from the matching principle. This accounting principle mandates that expenses should be recorded during the period in which the revenues related to those expenses are earned. In the context of warranties, when a company sells a product, the sale generates revenue in that period, and any potential costs related to warranty repairs or replacements are estimated and recorded as a liability. This ensures that the expenses match with the revenue they relate to, providing a more accurate picture of the company’s financial performance during that period.
Answer: D. matching