This is because the company has an obligation to honor the gift card and provide the corresponding goods or services. As such, it’s important for businesses to understand how gift cards should be properly recorded and reported in their financial statements. Various promotion options exist, and each of those options needs to be carefully analyzed to ensure proper tracking in the gift card system.

• Along with the popularity of gift cards come consumer complaints about restrictions on their use.If neither state escheats gift cards, the state of sale may step in and exercise its right of escheat.
• At the same time, they need to record the gift card liability which represents the amount of liability that company needs to fulfill for customers when they redeem the card.
• Ultimately, offering gift cards does create some extra steps in your accounting.
• Namely, make sure you properly track issue date, original amount, redemption date, and redemption amount.
• We will explore how gift cards are classified, how they are initially recorded, and the treatment of unredeemed gift cards.

As stated above, gift cards are deferred revenue until the gift card is redeemed. There is also the risk of errors in managing and auditing the gift card program that result in discrepancies over time. You will need to perform frequent audits and checks to ensure all transactions involving gift cards are recorded accurately according to accounting standards. If a customer returns an item that they purchased using a gift card and you plan to reimburse them by increasing the value of their gift card, you are then increasing the amount you owe to them.

Sale Recognition

Beyond this step, process the refund the same as you typically would for any return. It is necessary that you carefully log the adjustment to the gift card liability balance to keep this account reconciled and prevent errors. Though handling gift card refunds may require extra care, this will ensure your store maintains compliance and operating smoothly. 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. Now that we have covered the accounting for redeemed gift cards, let’s explore how additional gifts purchased using gift cards are accounted for.

• I’m delighted to help you record the sales and redemption of the gift cards when customers use them to purchase.
• Escheatment is the process that which unclaimed assets are required to transfer to the government or state.
• Consistency in revenue recognition practices helps maintain the integrity and comparability of financial statements.
• To illustrate how this works, imagine your client sells a gift card for $100.

It’s important to quickly highlight the risks involved with offering gift cards. In the scenario that someone returns an item that was purchased with a gift card, and you intend to increase their gift card value as a refund, you are increasing the liability owed. 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. Similarly, Ontario has unique rules for multi-store or mall gift cards.

On top of that, there are specific provincial and territorial rules your clients may need to follow. To help your clients, you may want to check out the exact rules in their area. The net gift card liability is $300, which represents the cash received from Sam’s Club. If there is a reasonable expectation that a certain proportion of gift cards will not be used, this amount can be recognized as revenue. That’s because nearly half of U.S. adults (47%) had at least one unused gift card, voucher, or store credit last year, according to a CreditCards.com survey conducted in 2022 by YouGov.com.

Example 1: Non-Taxable Gift

However, this differs in the UK when tax is applied when the card is initially issued. With this in mind, ensure that your gift card transactions are priced correctly for tax reporting to avoid costly mistakes. Ultimately, offering gift cards does create some extra steps in your accounting. However, using a gift card liability account makes it significantly easier to keep track of them all. If you’re using an Amaka accounting integration, you can have peace of mind that all steps are being accounted for automatically. To learn about the income tax treatment of this transaction, you should seek advice from a tax professional or go to The gift certificate is for a service and does not cost us anything.

II. Classifying Employee Gift Cards

Although accounting for gift cards is tricky, it’s worth it for most of your clients. Thanks to the forfeiture rate, gift cards help improve your client’s bottom line. The company records the journal entries related to the redemption of the gift card and to the recognition of breakage income as shown in Exhibit 5. Henry’s Hotdogs sells gift cards redeemable at any of their seven restaurant locations. Henry’s Hotdogs consulted with the company’s unclaimed property specialist and determined that its gift cards are not subject to unclaimed property laws. Alternatively, your business should be aware of unclaimed property laws for your state.

Trial Balance

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Gift card providers

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. They also provide a unique cash flow benefit to your businesses by delaying the exchange of goods in return for payments. When a customer purchases a gift card from you, you receive money from the customer but you haven’t provided a good or service yet. Because you haven’t provided anything in exchange for their money, this is a liability to your business.

However, in some regions, there are escheatment laws that require the cash from unredeemed gift cards to be remitted to the government under certain circumstances. Double check what laws exist for you or look for an accounting professional. It is worth mentioning that the specific accounting liquidity definition accounting treatment for gift card sales might vary depending on the accounting standards followed by the company. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) provide guidance on the recognition and treatment of gift card sales.