What is Gift Card Accounting?

Gift Card Accounting

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Gift Card Accounting

Gift card accounting refers to the way businesses record and manage the sale and redemption of gift cards. This can be a complex process, as gift cards involve both revenue recognition and liability management. Here’s a general breakdown:

  • Initial Sale: When a gift card is sold, the business does not immediately recognize this as revenue, even though they receive cash. Instead, the amount is recorded as a liability on the balance sheet, often under “unearned revenue” or “deferred revenue. This is because the business has an obligation to provide goods or services in the future.
  • Redemption: When a gift card is redeemed, the business reduces the liability and recognizes revenue equal to the value of the goods or services provided. If the gift card covers the entire purchase, the entire liability is removed. If the gift card only covers part of the purchase, the liability is reduced by the amount the gift card covered, and the remaining portion of the purchase is recognized as revenue.
  • Breakage: Over time, some gift cards will never be fully redeemed or used at all. The unredeemed portion is known as “breakage”. Accounting standards allow businesses to recognize breakage as revenue once the likelihood of the gift card being redeemed is deemed remote. How this is determined can depend on various factors, including local laws and historical redemption patterns.

It’s important for businesses to track gift card sales and redemptions accurately, both for financial reporting and tax purposes. Incorrect gift card accounting can lead to misstated financial statements and potential legal issues.

Example of Gift Card Accounting

Here’s a simplified example to demonstrate the basics of gift card accounting:

Imagine you own a bookstore and you sell a gift card for $100.

  • Initial Sale: When you sell the gift card, you receive $100 cash, but you can’t recognize it as revenue yet because you still owe a service (i.e., $100 worth of books) to the gift card holder. So, you would debit (increase) Cash for $100 and credit (increase) Unearned Revenue (a liability account) for $100.
  • Redemption: Now, let’s say the gift card holder comes in and buys $60 worth of books using their gift card. At this point, you have fulfilled $60 worth of your obligation. So, you would debit (decrease) Unearned Revenue for $60 and credit (increase) Sales Revenue for $60. If the customer makes a partial payment, say $30 from the gift card and $30 cash, the entries would be similar: Debit Unearned Revenue $30, Debit Cash $30, Credit Sales Revenue $60.
  • Breakage: At some point, you determine based on your history and relevant regulations that the remaining $40 on the gift card will likely never be redeemed (the card has been inactive for a while, for instance). At this point, you can recognize the unredeemed amount as breakage revenue. So you’d debit Unearned Revenue $40 and credit Sales Revenue (or a separate Breakage Revenue account, if you want to track this separately) $40.

Remember, this is a simplified example and actual accounting practices can get more complicated. Factors like sales tax, the exact timing of recognizing breakage, and dealing with multiple jurisdictions can complicate things. As always, businesses should consult with an accountant or auditor to ensure they’re following all applicable accounting standards and regulations.

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