ASC 606 and Gift Card Accounting

Then, let’s say the customer uses $80 of the gift card to purchase some products from your client. At that point, you debit the gift card deferred revenue column for $80. If this is the only gift card on the books, the total in that column drops to $20. To balance the books, you also record the $80 in the sales or revenue account as a credit. Breakage is a recognition of expected unexercised right or forfeiture of any prepaid right or a sale incentive. When a gift card is sold, and then subsequently redeemed for the full amount, revenue recognition is straightforward and is fully recognized upon redemption.

The fees cannot kick in until one year of inactivity has passed and you can only charge one fee per month.
In 2006, Best Buy reported that 24 months is a reasonable point at which the company can assume a gift card of that age will not be redeemed.
It allows the receiver to use and purchase whatever they want in the store.
If this is the only gift card on the books, the total in that column drops to $20.

Not only are they convenient for gift givers and recipients, the benefits of gift cards and gift certificates are plentiful for issuing businesses. A significant source of cash, they are a catalyst for consumer “upspending” and reduced returns. The most popular categories are fine dining, fast casual eateries and drugstores. The journal entry is debiting gift card liability and credit sale revenue.

IRS Issues Guidance on Treatment of Gift Cards

It is also the time for company to record revenue as the goods or service is delivered. As the name suggests, the gift card is commonly used as a gift that one person gives to another person. So gift card is very popular, especially during the holiday season. People will purchase a gift card from any company and send it to their loved ones.

The Company should continuously monitor redemptions in the gift card monitoring system and analyze actual forfeitures on gift cards to ensure proper breakage.
If a restaurant’s gift card includes fees, those fees should be clearly stated on the card or the packaging in which the gift card is sold.
It is important to keep track of the state in which a gift card is sold.
The company has to record revenue every time the customer redeems the gift card.

He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. I recommend consulting an accountant to help and guide on which account to debit and credit.

How to do accounting for Gift-cards

Because of their nature, cards are often sent from one state to another, unredeemed, and even subject to fraud (both internal and external) like theft, misrepresentation, and retail employee scams. Does anyone know the policy statement of classifying expenses as selling expense? I researched and found in GAAP the definition of selling expense is expense related to sell of product.

The initial issuing of a gift card is a liability

Offering Shopify gift cards is an excellent way for e-commerce stores to boost revenue and enhance customer experience, but managing gift card sales requires careful accounting and planning. As a merchant, you need to keep track of gift card liabilities, address challenges like fraud prevention proactively, charge correct taxes, and streamline understanding a bank’s balance sheet bookkeeping processes whenever possible. The company can record revenue when the customer brings back the card and use them to purchase the goods or service. The company has provided the goods or service to the customers, so it is time to record revenue. The obligation is also settled, so it should reverse the gift card liability.

In times of uncertainty, many e-commerce businesses have looked to gift cards as a way to supplement cash flow. Lastly, if a state does require an unused gift certificate or gift card to be remitted back to the state after a period of time, these gift cards should not be included in the above breakage calculation. With all rules come exceptions and gift card revenue recognition is no different. As stated above, gift cards are deferred revenue until the gift card is redeemed. Fast forward one week and the gift card recipient buys lunch for $20. With this gift card redemption, Company A has met the requirements for revenue recognition under ASC 606, Revenue Recognition and Company A debits deferred revenue for $20 and records $20 in revenue.

Trial Balance

The essential accounting for gift cards is for the issuer to initially record them as a liability, and then as sales after the card holders use the related funds. There are varying treatments for the residual balances in these cards, as noted below. 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.

The unique accounting challenges posed by gift cards and gift certificates evoke the debate over cash accounting versus accrual accounting (GAAP basis). 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. The issuer of the gift cards has to prepare a proper accounting policy to record the revenue from the sale of gift cards. The company will receive cash when the gift card is sold to the customer. In this article we covered many of the important things to note when selling gift cards on Shopify. Overall, there are many benefits to your business through offering gift cards as an option.

Otherwise, it can turn into an accounting nightmare to dissect all data points from the system at the period close and when determining breakage to recognize. 2019 was a big year since ASC 606 became effective for private entities, and revenue recognition rules have changed. Hopefully, you were able to navigate through the changing accounting environment. Nevertheless, we will discuss applicable guidance with examples below as a reminder to seasoned owners or as a starting guide for new restauranteurs. Please keep in mind that the following discussion is related to US GAAP reporting. On the other hand if you use gift cards as a promotional item, it would be a marketing expense.

When evaluating a gift card service provider, reviewing the different reporting options available under the platform prior to engaging with a provider is recommended. When a gift card is used, the initial liability is shifted into a sale transaction. They have to record the revenue and reverse the liability for the same amount. Display gift cards by your register and prominently on your e-commerce website to catch shoppers’ eyes. Our partners cannot pay us to guarantee favorable reviews of their products or services. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping.

This is called breakage, which in essence is the portion of gift card sales that will never be redeemed. This will require Company A to make an estimate of what it believes is the gift card value of sales that will never be redeemed. For additional information or more details about accounting for gift card sales, contact a member of Withum’s Consumer Products team.