Accounting for Gift Card Sales

accounting for gift cards

The journal entry is debiting cash $ 200,000 and credit gift card liability $ 200,000. Essentially, some states require retailers to turn over the full unredeemed value of gift cards, while others require retailers to surrender a percentage of the unredeemed value (usually 60%). Various promotion options exist, and each of those options needs to be carefully analyzed to ensure proper tracking in the gift card system. From an accounting standpoint, gift cards represent an obligation on the part of the issuing company until they are redeemed. This is because the company has an obligation to honor the value of the gift card and provide the corresponding products or services.

accounting for gift cards

There is no doubt gift cards and certificates – in their paper, plastic and digital forms – are here to stay. While accounting methodology treatments may vary, so do state definitions and statutes. As a result, the only way for businesses to ensure compliance and accuracy is to turn to a trusted business advisor with expertise and experience in the complexities of the consumer products sector.

Trial Balance

The Company should continuously monitor redemptions in the gift card monitoring system and analyze actual forfeitures on gift cards to ensure proper breakage. Having a reliable system to track gift card balances helps alleviate end-of-the-year stress, provides a full picture of outstanding amounts, and ensures compliance with accounting rules. It is worth mentioning that the specific accounting treatment for gift card sales might vary depending on the accounting standards followed by the company.

The gift card phenomenon has been gaining traction for more than 35 years and is more popular than ever due to their convenience. Per Statista, during the 10-year period from 2008 to 2018, an increase from $91B to $160B has been reported in gift-card sales. A great fallback for hard-to-buy-for recipients, gift cards’ upward trajectory is directly linked to this modern era of online shopping. In some cases, customers may also have to pay the difference in price if the value of the gift card is not sufficient to cover the full amount of the purchase. The payment for the difference would be recorded as a separate revenue transaction, similar to any other customer purchase. Gift cards have become a popular option for consumers to give and receive as presents.

accounting for gift cards

However, it is important to note that the revenue is not immediately recognized as income. Rather, it is recognized as a liability on the income statement, offsetting the deferred revenue recorded on the balance sheet. The unique accounting challenges posed by gift cards and gift certificates evoke the debate over cash accounting versus accrual accounting (GAAP basis).

Accounting for Gift Card Sales

The business has received the cash of 1,500 however, the goods have not yet been provided to the customers and the revenue cannot be recognized. The amount is credited to the balance sheet gift cards liability account (deferred revenue). For example, a franchisee of a restaurant might look at the franchisor’s breakage rate used to determine the breakage rate it will use. Public companies are required to disclose their estimated breakage rate used in the footnotes to their financial statements. For example, a company would track its gift cards over a period of time and then determine the percentage of breakage over that period.

Be the first to know when the JofA publishes breaking news about tax, financial reporting, auditing, or other topics. The illustrations presented up to this point apply to situations where the company is allowed to keep the full amount of the unredeemed cards. When the gift card is redeemed by the customer for services or goods, you reduce your company’s gift card liability and record revenue for the sale to the customer. The accounting for recording purchases and redemptions under the new standard is consistent with the accounting under the old standard. SEC Staff Accounting Bulletin no. 101 generally requires the transfer of product as a necessary condition for revenue to be recognized. When a retailer sells a gift card to a customer, the payment for a future purchase is received upfront, but transfer of merchandise is delayed at the consumer’s discretion.

  1. Consequently, there must be a system for tracking unused gift cards, which trigger a remittance once the statutory dormancy period has been exceeded.
  2. The National Retail Federation said 2006 holiday sales of gift cards were $27.8 billion.
  3. Public companies are required to disclose their estimated breakage rate used in the footnotes to their financial statements.
  4. Now that we have covered reporting and disclosure of gift cards, let’s wrap up with a summary of key points.

On the other hand, open-loop gift cards introduce an additional layer of complexity, as the liability extends to any merchant that accepts the payment network. Imagine the customer in the above example never returns to your client’s shop, and the remaining $20 gift card balance remains forever. Ideally, it’s a good idea for you to estimate your client’s breakage or forfeiture as you account for the gift cards.

Often considered unclaimed property, businesses must have a documentation system for tracking unused gift cards. In turn, this triggers remittance to the state once the dormancy period has been surpassed. It is important for businesses to have proper systems and controls in place to accurately track and record these types of transactions. This includes distinguishing between the portion of the transaction paid with the gift card and the portion paid with other forms of payment, such as cash or credit cards. On top of that, gift cards can provide an effective tool to get new customers into a store. In fact, your clients may want to take advantage of this angle by encouraging their regular shoppers to buy gift cards for their friends and family.

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In terms of cash accounting, some practitioners leave the sale on the income statement, which allows for easier determination of net sold versus redeemed revenue. Now that we have covered the accounting for additional gifts purchased with gift cards, let’s move on to discussing the reporting and disclosure requirements for gift cards in financial statements. Now that we have covered the recognition of revenue from gift cards, let’s move on to understanding how the redemption of gift cards is accounted for in the financial statements.

For example, in New Brunswick, you can’t charge fees for using gift cards unless the fee is for personalizing the gift card or replacing it, but you can charge dormancy fees for multi-store gift cards. To help your clients, you may want to check out accounting blog the exact bookkeeping outsource rules in their area. Accounting for the sale and redemption of gift cards under GAAP is pretty straightforward. Since 1999, gift card purchases have exploded, from $19 billion to an expected $160 billion in 2018.

Card recipients may not use them for months, so the initial “sale” of the card only results in the recordation of a liability, which is eventually transformed into a sale when the card is used by the recipient. Gift Card Sales are the business transactions in which the company exchanges the gift card for cash. Gift cards or gift vouchers are prepaid cards that consist of a specific amount of cash that can be used to purchase in a specific store. Now that we have covered the accounting for redeemed gift cards, let’s explore how additional gifts purchased using gift cards are accounted for. By the end of this article, you will have a comprehensive understanding of how gift cards are recorded in accounting and the implications for businesses that offer them. If the business is unable to estimate the breakage amount, the revenue for the unused portion of the gift card is recognized when the likelihood of the customer redeeming the gift card becomes remote.