Journal Entry for Gift Cards

Gift cards are gift certificates that business usually sells to customers for cash. The customer will be able to use the gift card to redeem goods or services with the company over a certain period of time. It seems like the currency that only the company is recognized and used in a cash exchange.

As the name suggests, the gift card is commonly used as a gift that one person gives to another person. Instead of cash, people use gift cards. In some countries, giving cash is considered inappropriate. So gift card is very popular, especially during the holiday season. People will purchase a gift card from any company and send it to their loved ones.

The gift card allows anyone to use it in a specific store. The most popular gift card include apple, amazon, best buy, Walmart, and others. A gift card, also known as a pre-paid card, is a type of payment card that is given to someone as a gift. There are many benefits to giving a gift card because it provides the recipient with choices and convenience. It also eliminates the hassle of having to choose a gift and wrapping it. Gift cards are widely available and can be used at many different stores.

The issuer of the gift cards has to prepare a proper accounting policy to record the revenue from the sale of gift cards. The company will receive cash when the gift card is sold to the customer. However, the goods or service is not yet provided to the customer.

Based on the accounting rule, revenue is recognized when the goods or services transfer to the customer. The cash that receives in advance is recorded as the deferred revenue which is the liability on balance sheet. When the gift card is redeemed, it is the time that revenue should be recorded.

Journal Entry for Gift Cards

The journal entry related to the gift card is separated into several as following

Point of Sale

The transaction starts when the company sells the gift card to the customer. They will receive cash immediately, they also have the obligation to provide the goods or services in the future. They have to record both cash and liability.

The journal entry is debiting cash and credit gift card liability.

Account Debit Credit
Cash $$$
Gift Card Liability $$$

The transaction will increase the cash balance which receives from selling the gift card. At the same time, they need to record the gift card liability which represents the amount of liability that company needs to fulfill for customers when they redeem the card.

Gift Card Redemption

When the customers come back and redeem the gift card, the company has to provide the goods or services based on the value on the card. The company has to record revenue and reveres the gift card liability.

The journal entry is debiting gift card liability and credit revenue.

Account Debit Credit
Gift Card Liability $$$
Gift Card Revenue $$$

The transaction will remove the liability as to the company already completed for customer. It is also the time for company to record revenue as the goods or service is delivered.

Gift Card Expiration

Most of the gift cards come with an expired date. They will be useless after a certain period. The company set the expired to ensure that the customer will redeem the card sooner and they do not have to wait for a long period of time. However, some gift cards are not redeemed on time due to various reasons. The company has to write them off and record revenue after the gift card expires.

However, the unclaimed gift card may be transferred to the government depending on the local law. Escheatment is the process that which unclaimed assets are required to transfer to the government or state. It is different from one country to another.

Example

Company ABC has sold the gift card during the holiday for $ 200,000. During the next month, customers redeem the card amount of $ 100,000 to purchase various goods in the stores. After the expired date, the company found that the gift card amount of $ 10,000 is not redeemed. Please prepare journal entry for the gift card transaction above.

When the company sells the gift card to customers, they will receive cash as well as the obligation to customer. The journal entry is debiting cash $ 200,000 and credit gift card liability $ 200,000.

Account Debit Credit
Cash 200,000
Gift Card Liability 200,000

During the month, company receives the redemption of $ 100,000. They have to record the revenue and reverse the liability for the same amount.

The journal entry is debiting gift card liability $ 100,000 and credit gift card revenue $ 100,000.

Account Debit Credit
Gift Card Liability 100,000
Gift Card Revenue 100,000

The company has to record revenue every time the customer redeems the gift card. On the expired date, the $ 10,000 gift card is not redeemed, so company has to record it as revenue. The journal entry is debiting gift card liability $ 10,000 and credit gift card revenue $ 10,000.

Account Debit Credit
Gift Card Liability 10,000
Gift Card Revenue 10,000