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.
Background of Gift Cards
Gift cards are a concept that has been in use for many years, first appearing as employer-provided scrip that employees could use to acquire goods in the company store. The current interpretation of the gift card has since been expanded to include all consumers, not just employees.
Gift cards are a boon to the companies selling the cards, for the following reasons:
- Source of cash. The recipients of gift cards do not necessarily use them. Depending on the study, it appears that between 10% and 20% of all gift cards are not used.
- Upspending. Many card recipients spend not only the amount on the card, but a great deal more, which is known as upspending.
- Returned goods. The amount of goods returned to the company decline from what would be experienced with a gift purchase, since the card recipient knows exactly what he or she wants to buy.
Accounting for Gift Cards and Gift Certificates
There are a number of accounting issues related to gift cards, which are:
- Liability recognition. The initial sale of a gift card triggers the recordation of a liability, not a sale. This is a debit to cash and a credit to the gift cards outstanding account.
- Sale recognition. When a gift card is used, the initial liability is shifted into a sale transaction.
- Breakage. If there is a reasonable expectation that a certain proportion of gift cards will not be used, this amount can be recognized as revenue.
- Escheatment. When a gift card is not used, the funds must be remitted to the applicable state government; the company cannot retain the cash. This requirement is stated under local escheatment laws that cover unclaimed property. Consequently, there must be a system for tracking unused gift cards, which trigger a remittance once the statutory dormancy period has been exceeded.
- Fraud reimbursement. A thief could obtain access to the identification codes for individual gift cards that are on display in retail stores, wait for someone to buy the cards, and then use the codes to buy goods. When this happens, the issuing entity should reimburse the defrauded customers, which should be tracked by the accounting staff.
Though it is not an accounting transaction, you should also be aware of the delay in recognizing sales caused by gift cards. 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.