Before You Start

This guide assumes you have a foundational understanding of GAAP principles, especially regarding liabilities and revenue recognition.

Overview

25 min
Setup Time
Intermediate
Difficulty
Quarterly
Maintenance

What You’ll Learn

  • How to correctly record gift card sales as deferred revenue
  • Recognizing revenue only upon gift card redemption
  • Accounting for unredeemed gift card balances (breakage)
  • Maintaining GAAP compliance for gift card liabilities

1. Core Principles of Gift Card Accounting

Proper gift card accounting hinges on these fundamental GAAP principles:

Key Accounting Concepts

  • Initial Sale = Liability (Deferred Revenue)
  • Redemption = Revenue Recognition
  • Expiration/Breakage = Revenue Recognition

Required Accounts in your GL

  • Gift Card Liability (Liability)
  • Gift Card Sales Revenue (Income)
  • Gift Card Breakage Income (Other Income)
  • Cash/Bank (Asset)

2. Initial Sale: Recording the Liability

When a customer purchases a gift card, it’s not immediate revenue. It’s a liability, as you owe the customer goods or services in the future.

Scenario A: Cash Purchase of a Gift Card

This is the most straightforward scenario.

Pros:
  • Simple cash receipt.
  • Clear liability increase.
  • No payment processor fees at this stage.
Cons:
  • Requires tracking specific gift card numbers.
  • Manual entry for small businesses.
  • No revenue recognized yet.

Scenario B: Credit Card Purchase of a Gift Card

This is more common for online sales or point-of-sale systems.

Expert Tip: Remember, the net effect of a gift card sale is an increase in Cash (or Accounts Receivable, depending on payment method) and a corresponding increase in a liability account. No revenue is recognized until the gift card is redeemed or legally expires.

3. Redemption: Recognizing Revenue

Revenue is recognized only when the gift card is redeemed for goods or services.

Here is an example journal entry for a gift card redemption:

{
  "date": "2025-10-29",
  "journal_entry_type": "Gift Card Redemption",
  "debits": [
    { "account": "Gift Card Liability", "amount": 50.00 }
  ],
  "credits": [
    { "account": "Gift Card Sales Revenue", "amount": 50.00 }
  ],
  "description": "Redemption of Gift Card #GC12345 for merchandise."
}

4. Accounting for Unused Balances: Breakage

  1. 1

    Determine Your Breakage Policy

    Establish a clear policy based on historical redemption rates and relevant state escheat laws. This is often done annually or quarterly.

  2. 2

    Calculate the Breakage Amount

    Based on your policy, calculate the portion of the remaining gift card liability that can be recognized as income.

  3. 3

    Record the Breakage Journal Entry

    Debit the Gift Card Liability account and credit a ‘Gift Card Breakage Income’ account to recognize this non-redemption as revenue.

State Escheat Laws are Critical

Unclaimed property laws vary significantly by state. Ensure your breakage policy and accounting comply with these laws to avoid penalties and ensure proper reporting.

5. Reconciliation & Reporting

Monthly Reconciliation Checklist

  • Reconcile Gift Card Liability account balance with outstanding gift card report
  • Verify revenue recognition matches actual redemptions
  • Review breakage entries for accuracy and compliance
  • Ensure all gift card transactions are correctly categorized

Need Help?

Expert Guidance on Liabilities

Complex liability accounting can be tricky. Our team specializes in GAAP compliance and can assist with your specific gift card accounting needs.

Contact Us