Final answer:
It is true that, according to the matching principle in accounting, a warranty expense should be recorded in the same period as the related product sale. This ensures financial statements accurately reflect the costs associated with revenues. The principle also applies to service contracts, maintaining consistency in financial reporting.
Step-by-step explanation:
According to the matching principle, it is true that a business should record a warranty expense in the same period as the related sale of the product with the warranty. The matching principle is a foundational accounting concept that dictates that expenses should be recorded in the same accounting period as the revenues that they help to generate. In the case of a warranty, even though the actual repair or replacement may occur in a future period, the expense is directly related to the sale that generates the revenue, thus, it must be matched to the same period as the sale. This ensures that the financial statements reflect the true cost of the revenue earned, giving a more accurate picture of the company’s financial health.
A service contract differs slightly from a warranty, in that it is an additional purchase made by the buyer. However, similar to the warranty expense, the cost associated with fulfilling service contracts should also be recognized in the period in which the related revenue is recognized, thereby adhering to the matching principle. This practice is particularly relevant for large purchases such as cars, appliances, and even houses, where warranties and service contracts are common.