Accounting for Gift Card Sales
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.
Gift cards can be physical cards or electronic which consist of serial numbers that can be redeemed for the amount of cash and used to purchase in a specific store.
The gift card allows the customer to transfer the card as a gift from one person to another. It allows the receiver to use and purchase whatever they want in the store. For example, customers can use Apple gift cards to purchase any product or service sold by Apple.
When the company sells gift cards, it will receive cash from customers. But they cannot record the revenue immediately. They need to record liability which is the obligation to fulfill the customer’s requirement when they redeem the gift cards.
The company can record revenue when the customer brings back the card and uses it to purchase the goods or services. The company has provided the goods or services to the customers, so it is time to record revenue. The obligation is also settled, so it should reverse the gift card liability.
Journal Entry for Gift Card Sales
When the company sale gift cards to customers, they will receive cash payments. However, they do not yet record the sale revenue. They have the obligation to settle the gift card amount with the service or goods.
The journal entry is debiting cash and credit gift card liability.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Gift Card Liability | 000 |
The entry will increase cash received from the customer. It also increases the liability on the balance sheet which is the company’s obligation to fulfill for customers.
When the customer uses the gift card to purchase the product or service, the company will reverse the gift card liability and record revenue.
The journal entry is debiting gift card liability and credit sale revenue.
| Account | Debit | Credit |
|---|---|---|
| Gift Card Liability | 000 | |
| Sales Revenue | 000 |
Example
Company ABC is the retail store. During the holiday, company sold the gift cards for $ 200,000 to various customers. In the same month, the customer redeemed the gift card $ 10,000 to purchase the products. Please prepare accounting records for gift cards transactions.
The company has sold gift cards for $ 200,000. It is not yet the revenue, the company records cash received and liability.
The journal entry is debiting cash of $ 200,000 and credit gift card liability $ 200,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 200,000 | |
| Gift Card Liability | 200,000 |
During the month, some customers have used a gift card to purchase goods and services. The company has to reverse the gift card liability and sale revenue.
The journal entry is debiting gift card liability $ 10,000 and credit sales revenue $ 10,000.
| Account | Debit | Credit |
|---|---|---|
| Gift Card Liability | 10,000 | |
| Sales Revenue | 10,000 |
The Benefits of Gift Cards for Businesses
Gift cards have evolved beyond being simple gift options and have become powerful tools for businesses, offering a wide array of advantages. Here’s a quick summary of the key benefits:
Brand Awareness: Both physical and digital gift cards act as mini-advertisements, keeping your brand visible and top-of-mind for customers and potential clients.
Increased Sales: Gift cards capture holiday spending and extend across diverse industries, enabling businesses to tap into seasonal trends and expand their customer base beyond traditional retail sectors.
Digital Compatibility: Modernize your payment options by offering digital gift cards that align with customers’ preferences. Integrate these seamlessly with your e-commerce platform, providing convenience for both purchasers and recipients.
Customer Engagement: Gift cards provide a positive gifting experience, fostering deeper connections with customers. They also create opportunities for further interaction, encouraging repeat business and loyalty.
Data Insights: Gift card purchases and registrations provide valuable customer data. Businesses can leverage this information to understand consumer behavior, preferences, and demographics, enabling them to tailor their offerings to better meet customer needs.
Safe and Convenient: Modern gift cards offer enhanced security features compared to traditional paper certificates. They also provide a safe and convenient way for customers to make purchases, whether online, through a mobile app, or in-store.
Easy Distribution: Businesses can leverage popular gift card malls, both physical and digital, to reach a broader audience. This increases brand visibility and attracts new customers who may not have discovered the business through other channels.
Improved Cash Flow: Gift card sales allow businesses to generate revenue upfront. This immediate influx of cash provides a financial boost, particularly when compared to other marketing strategies that may take longer to yield returns.
Cons of Selling Gift Cards
1. Extra bookkeeping: Gift cards require specific accounting techniques. Sales aren’t recorded as regular revenue but as a liability, meaning you owe the customer goods/services in exchange for the card value. This necessitates separate tracking and adjustments when the card is redeemed.
2. Potential increase in customer service inquiries: Introducing gift cards can lead to inquiries about their use, technical issues, or lost/stolen cards. This can add workload during busy periods and requires good customer service preparation.
3. Fraud risk: Anonymity makes gift cards a target for scams. Stolen credit card information can be used to buy them, creating untraceable purchases or resales. Hackers may also steal bulk card numbers or manipulate databases to commit fraud.
Breakage of Gift Card
Breakage refers to the profit that retailers gain from unredeemed gift cards, signifying the funds retained by companies for unused cards, even when the promised goods or services remain unclaimed.
Recognizing the significance of breakage in the context of gift card transactions, the Financial Accounting Standards Board (FASB) has developed a new accounting model. This model serves to assist companies in precisely tracking and reporting revenue derived from gift cards, taking into consideration the potential scenario where these cards may go unused.
In 2019, the FASB implemented new guidelines specifically addressing the accounting treatment of gift card breakage. These guidelines were introduced to establish a standardized approach, ensuring consistency and transparency in accounting practices related to breakage across various companies.
By doing so, the FASB aims to enhance the reliability of financial reporting, providing stakeholders with a clearer understanding of how companies account for and manage unredeemed gift cards. The implementation of these guidelines helps maintain a level playing field in the industry and supports the comparability of financial information among businesses engaged in gift card programs.
Estimation of Gift Card Liabilities
Accurately estimating the value of un-redeemed gift cards, also known as “gift card liabilities,” is crucial for businesses to maintain healthy financial records. This involves predicting what percentage of issued gift cards will eventually be used for purchases.
Several factors influence this estimation process:
1. Historical Redemption Rates: Analyzing past data on gift card redemption patterns within the business is the most robust starting point. Examining redemption trends by time period, denomination, and purchase channel can reveal valuable insights.
2. Expiration Policies: Gift card expiration dates, if enforced, directly impact redemption likelihood. The closer a card is to expiry, the higher the chance of redemption. Companies must factor in their specific expiration policies and historical redemption patterns near expiry dates.
3. Promotional Strategies: Marketing campaigns and gifting seasons can temporarily influence redemption rates. Analyzing the impact of past promotions and upcoming initiatives can help adjust liability estimates.
4. Consumer Demographics: Understanding the customer base purchasing and redeeming gift cards provides valuable clues. For example, gift cards bought for birthdays or holidays might have higher redemption rates than those received for casual occasions.
5. Industry Benchmarks: Comparing redemption rates with industry averages for similar businesses can offer another data point. However, it’s essential to consider individual business differences when using such benchmarks.
6. Technological Factors: Digital gift cards typically have higher redemption rates than physical cards. Additionally, online redemption options can further increase usage. Businesses should consider the technological factors impacting their specific situation.