How do I account for gift cards and store credit?
When you sell a gift card, you receive cash but you haven’t actually earned that money yet. The customer gave you $50 and you now owe them $50 worth of products or services. That’s a liability, not revenue. The same logic applies to store credit you issue for returns or customer satisfaction.
Set up a liability account in your accounting software called Gift Card Liability or Unearned Revenue. When you sell a $50 gift card, record it as a debit to Cash and a credit to Gift Card Liability. Your cash increases, but so does what you owe customers.
When someone redeems that gift card, you move the amount from the liability to revenue. If they buy $50 worth of merchandise using the gift card, debit Gift Card Liability and credit Sales Revenue. Now you’ve earned the money because you delivered the goods.
Partial redemptions require tracking. A customer buys $30 worth of items with a $50 gift card, leaving $20 remaining. You recognize $30 in revenue and keep $20 in the liability account. Most point-of-sale systems track individual card balances, but your accounting software just needs to show the total liability outstanding.
Retail businesses and restaurants should reconcile their gift card liability account monthly. Pull a report from your POS showing total unredeemed gift card balances and compare it to the liability on your books. Discrepancies mean something got recorded wrong, either a sale or redemption was missed.
Store credit from returns works the same way. Instead of giving cash back, you give the customer credit to use later. That’s a liability until they use it. Record it to the same account or a separate one if you want to track them separately.
Eventually some gift cards never get redeemed. This is called breakage. After a reasonable time period, usually two to three years, you can recognize the remaining balance as revenue. Arizona doesn’t have escheatment laws for gift cards sold by retailers, but the rules vary if you do business in other states.
The liability account balance tells you exactly how much unredeemed value is sitting out there. If your Phoenix area bookkeeping services provider handles your monthly books, they should be reconciling this account regularly. Getting this wrong understates your liabilities and overstates your actual earned revenue.
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