Gift cards, also known as gift vouchers or gift certificates, are a significant source of revenue for numerous e-commerce businesses; however, not all are accurately managing their gift card bookkeeping. To maximize these advantages, it’s important to understand the correct accounting practices for gift cards.
Gift cards not only make excellent gifts but also provide opportunities for upselling and offer customers a distinctive way to support their favorite local businesses. Many e-commerce companies have turned to gift cards to boost cash flow during uncertain times.
Gift cards go through several stages, each associated with various accounting challenges. E-commerce businesses, in particular, must consider certain unique factors. This article will examine the essential accounting considerations when selling gift cards.
Recording Gift Card Liability
The first step in issuing a gift card is to record a liability. During a gift card’s initial ‘sale’, you should log a liability instead of a traditional sale. You will Credit (CR) the amount to a liability account designated for gift cards. For instance, this account might be named the Gift Card Liability account or Gift Cards Outstanding account, provided it functions as a current liability account. By crediting the gift card liability account, you increase the amount you need to honor when the gift card is redeemed.
When you credit an account, you must debit (DR) another account to keep your records balanced. Generally, you will debit a current asset account. We suggest debiting a payment clearing account, which records temporary transactions until they can be transferred to a permanent account. In this case, it refers to the time until the payment is deposited in the bank.
Some individuals erroneously credit sales when payment appears in their bank account, which can lead to duplicating sales upon the redemption of the gift card. Additionally, the payment clearing account may not be accurately cleared. Once the payment is deposited, it should be allocated to the payment clearing account to post a debit to the cash account and a credit to the clearing account.
Refunds on Gift Card Purchases
Returning an item purchased with a gift card indicates a choice to reinstate the value onto the gift card. This action increases the liability that must be accounted for once again. Consequently, credit must be issued to the gift card liability account.
Interestingly, not every organization handles item returns in the same manner. For example, some e-commerce platforms, such as Amazon, credit the funds to gift cards instead of their payment method to streamline their cash flow. This approach serves dual purposes: it helps to retain customers within their ecosystem and improves the company’s cash flow.
Tax Implications of Gift Cards
In most areas, no tax is applied at the initial issuance of a gift card; tax is only levied when the gift card is redeemed for merchandise and/or services. Therefore, taxes should only be recorded once in your financial records. However, in certain regions like the UK, taxes are recorded when issuing the gift card.
When a gift card is redeemed, it is recognized as a sale. At the time of redemption, we can then acknowledge a sales transaction. We will credit the sales account, which is typically a revenue account, and the tax account if you are in a location where tax is recorded solely upon the use of the gift card. This action reduces the liability account for gift cards since the amount has been satisfied. Therefore, you will debit your gift card liability account.
Handling Returns for Gift Card Purchases
If an item bought with a gift card is returned, and you choose to add value back to the gift card as a refund, you are thereby increasing the liability amount owed. This necessitates crediting the gift card liability account. The remaining process is handled just like any standard refund procedure.
Accounting for Expired Gift Cards
Once a gift card has expired, for instance, when it surpasses its expiration date, you can record its value as revenue. This process is referred to as breakage. However, certain jurisdictions have escheatment laws that might require funds from unused gift cards to be sent to the government under specific conditions. It’s wise to check the applicable laws in your area or consult an accounting expert.
Understanding and Mitigating the Risks of Gift Card Fraud
It’s crucial to mention the risks associated with selling gift cards. In cases where a scammer gains access to the gift cards you’ve issued and redeems one at your business, you will be responsible for reimbursing the defrauded customer, who was the original gift card purchaser. Ensure that detailed records of gift card sales are maintained.
The Bottom Line
Gift cards greatly benefit e-commerce businesses by enhancing cash flow, fostering customer loyalty, and offering opportunities for upselling. Properly managing the accounting of gift cards is essential for maximizing these benefits while reducing risks and ensuring compliance.
Accurately recording liabilities, being aware of tax implications, handling returns effectively, and maintaining vigilance against fraud can help streamline the gift card accounting process and prevent significant issues. Moreover, utilizing automation tools like Shopify integrations with accounting software can simplify the process, improve accuracy, and save time.
Lastly, adhering to local regulations concerning expired gift cards and escheatment laws will help maximize unclaimed sales while keeping your business compliant. By implementing these strategies, one can create an effective revenue stream from gift cards and focus on enhancing the overall shopping experience for customers.
Source: Gift Card Accounting: Strategies to Streamline Revenue in E-Commerce”
