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Gift card accounting for the holidays

The third quarter of the year is winding down and with the fourth quarter upon us, restaurants will start looking forward to the holiday season and the increased customer traffic, revenues and cashflows. Part of these increased cash flows are the result of the sale of gift cards during the holiday season. Two types of gift cards that are popular during the holiday season that you need to ensure you are accounting for correctly are:

  • promotional gift cards
  • gift cards sold through a 3rd party, such as Costco.

Let’s first look at promotional gift cards, which may look something like “buy a $100 gift card and receive a free $25 promotional gift card”. This type of promotional gift card is treated like a coupon and the discount of the promotional dollar value is taken as a reduction in revenue upon redemption. Any costs associated with these promotional cards need to be expensed as incurred. Upon issuance of these promotional gift cards, there is no liability recognized as no cash was received so no amounts need be recorded in your general ledger.

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However, I would recommend that for good internal controls in tracking, accounting and reconciling that a separate gift card number sequence is used for tracking these types of promotional gift cards and an accounting entry is made. The accounting entry would be to record the promotional gift cards as a liability with an offsetting contra liability for the same amount. Upon redemption of the promotional gift cards, revenue is recorded, and the promotional gift card liability is relieved along with the contra liability which needs to be recorded as a discount resulting in net revenue of zero.

Regarding breakage revenue for unredeemed promotional gift cards, since no cash was received upon sale there would be no breakage revenue to recognize. However, for good internal controls, it is recommended that these promotional gift cards have expiration dates and when they reach the expiration date the liability and contra liability is removed from the general ledger. If no expiration date is provided, then judgment on when the promotional gift cards will no longer be redeemed may need to be used to determine when to remove the liability and contra liability amounts.

Now, let’s consider gift cards sold through a 3rd party. Let’s say your restaurant has sold $100 gift cards to Costco for $70 per gift card. Costco will, in turn, sell these gift cards for $80 per gift card, but that has no bearing on how to account for these transactions. As mentioned above, a separate sequence of gift card numbers will need to be implemented for these gift cards sold through a 3rd party to properly track, account and reconcile this liability.

Similar to the accounting for promotional gift cards, when these gift cards are sold to Costco you need to record a liability for $100 and a contra liability for $30. When the gift card is redeemed in your restaurant, you will record revenue of $100 and relive the gift card liability for $100 and  then record a discount of $30 relieving the contra liability for $30 resulting in net revenue of $70, which is equal to the cash you received when the gift card was sold to Costco. Regarding breakage revenue for unredeemed gift cards, you must first determine each state’s escheatment laws to identify when unredeemed gift card dollars need to be remitted to the states. After considering escheatment laws, if amounts of unredeemed gift cards remain, gift cards should be analyzed for proper breakage that can be recognized as revenue in accordance with generally accepted accounting principles.

Should I be outsourcing my accounting services?

The key to accounting for these transactions lies with instituting a strong set of internal controls.  The internal controls implemented need to ensure that there is proper tracking of each type of gift card with its own unique sequence of numbers. Then, a proper monthly reconciliation process needs to be implemented to ensure the gift numbers outstanding have been reconciled to 3rd party reports and/or internal POS reports tracking gift card numbers that have been redeemed. The resulting reconciled list of outstanding gift card numbers will represent the amounts of gift cards that need to agree to the liability and contra liability amounts recorded in the general ledger.

For assistance in implementing internal controls over your gift cards, do not hesitate to reach out to one of our restaurant professionals.

 

Brian Campbell

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