‘Tis the Season For Gift Cards
As we enter the holiday season, now is a great time to refresh your understanding of gift card accounting under GAAP. For restaurant owners/operators and franchisors alike, gift card programs can be a powerful tool to boost revenue, but they also introduce complex accounting considerations.
In this article, we’ll break down common gift card scenarios, offer guidance on how to handle promotional discounts, and walk through how to record journal entries under ASC 606. Whether you’re reconciling year-end numbers or fine-tuning your tracking system, these tips will help you stay compliant and accurate.
Gift cards are cash received in advance of providing goods or services, which means revenue must be deferred under US GAAP. Under ASC 606, you do not recognize revenue at the point of sale. Instead, the funds are recorded as a liability until the gift card is redeemed and the performance obligation is satisfied.
Additionally, when a gift card is sold at a promotional value (for instance, selling a $25 gift card for $20), the company should recognize the $5 promotional incentive as a contra-liability to the gift card liability in the transaction price. It is important to evaluate each promotion option thoroughly to ensure accurate accounting within the gift card tracking system.
Gift Card Scenarios To Consider
Scenario 1 – No Promotion
The traditional option is a gift card sale at the restaurant. Restaurant A sells a gift card with a face value of $25. Upon the sale, the restaurant records the following entry:
|
Debit Entry |
Credit Entry |
||
|
Cash |
$25 |
Gift Card Liability |
$25 |
If the full amount is redeemed, the following entry is posted:
|
Debit Entry |
Credit Entry |
||
|
Gift Card Liability |
$25 |
Revenue |
$25 |
If only part of the gift card was redeemed, for example, $15, the company must record the redeemed portion and continue to track the remaining balance:
|
Debit Entry |
Credit Entry |
||
|
Gift Card Liability |
$15 |
Gift Card Revenue |
$15 |
Scenario 2 – $5 Promotion
Restaurant B sells gift cards with a face value of $25 for $20. Upon the sale of the gift card, the restaurant records the following entry, which ultimately captures the net cash received:
|
Debit Entry |
Credit Entry |
||
|
Cash Gift Card Liability Contra |
$20 $5 |
Gift Card Liability |
$25
|
If a gift card is fully redeemed, the restaurant must recognize revenue with the sale discount for the promotional amount:
|
Debit Entry |
Credit Entry |
||
|
Gift Card Liability Sale Discounts |
$25 $5 |
Gift Card Revenue Gift Card Liability Contra |
$25 $5 |
Scenario 3 – Bulk Sale To Warehouse Retailer
Another option that restaurant owners have is to run a promotion with a warehouse retailer. For instance, Costco buys in bulk ten gift cards with a face value of $50 for $30 and sells them for $40. At the time of the transaction, the company should record the following:
|
Debit Entry |
Credit Entry |
||
|
Cash Gift Card Liability Contra |
$300 $200 |
Gift Card Liability |
$500 |
The net gift card liability is $300, which represents the cash received from Costco.
As the gift card is redeemed, the restaurant must recognize revenue with the sale discount for the promotional amount. The example below assumes one $50 gift card that was purchased at Costco is redeemed:
|
Debit Entry |
Credit Entry |
||
|
Gift Card Liability Sale Discounts |
$50 $20 |
Gift Card Revenue Gift Card Liability Contra |
$50 $20 |
Adhere To Gift Card Best Practices
The best practice is always to track each gift card program (e.g., Costco, $5 promo) separately using distinct gift card number sequences from the start, supported by a reliable gift card system and a suitable set of general ledger accounts (it is best to gross up accounts as opposed to netting amounts against each other for cleaner reporting and reconciliations). Failing to do so can complicate accounting during period closes and when calculating breakage for recognition, potentially turning into a complex nightmare.
GBQ and its dedicated team of restaurant industry experts stand ready to assist you. To discuss this information in more detail, contact us today.
By Kari Maue, CPA, Director, Assurance & Advisory
Seeking additional tips and insights? Check out these resources:
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