Breakage definition
/What is Breakage in Accounting?
Breakage is that amount of revenue generated from unclaimed prepaid services or unused gift cards. The amount of breakage is difficult to estimate in advance, which can complicate the related accounting. Breakage results in pure profit for retailers, since there is no offsetting cost of goods sold. However, state governments sometimes claim breakage revenue under their escheatment laws; under these laws, the company forwards the unused funds to the government, from which customers can make claims.
Dormancy Fees
Some retailers who issued gift cards used to charge a small annual “dormancy fee” on the unused balances stored on these cards. By doing so, they were able to gradually recognize the unused amounts as fee revenue. However, the Federal Trade Commission has sued several companies for this practice, on the grounds that the fees were not properly disclosed to customers.
Example of Breakage
A mother buys a $100 gift card for her daughter. The seller receives $100 from the mother in exchange for the card, which is essentially an obligation of the seller to provide goods to the daughter at a later date. She then uses the card to make purchases totaling $96, after which she discards the card. The unused $4 on the gift card represents breakage for the seller.