Though gift cards, otherwise known as gift vouchers or gift certificates, are a key cash generator for many e-commerce businesses, not everyone is doing the bookkeeping for gift cards correctly. To ensure you’re making the most of the benefits, you’ll want to be aware of how to properly account for them.
Not only are gift cards great as presents, they offer an upselling opportunity and give customers a unique way to support their favourite small businesses. In times of uncertainty, many e-commerce businesses have looked to gift cards as a way to supplement cash flow.
There are a few different stages a gift card goes through, each that come with their own accounting issues. For e-commerce businesses in particular, there are a few unique factors that need to be taken into account. In this article, we’ll go through all the key accounting considerations you need to make if you’re selling gift cards.
- The initial issuing of a gift card is a liability
- Do you charge taxes on gift cards?
- When the gift card is used, it becomes a sale
- What happens when products are returned?
- How to automate accounting for gift cards
- What happens to gift cards that are no longer valid?
- Gift card fraud poses some risks
- Key takeaways on accounting for gift cards
The initial issuing of a gift card is a liability
At the initial ‘sale’ of a gift card, a liability is recorded rather than an actual sale. You Credit (CR) the amount to a liability account for gift cards. For example, the account can be called the Gift Card Liability account, Gift Cards Outstanding account or even Shopify Gift Card account, as long as the account is a current liability account. By crediting the gift cards liability account, you increase the amount that you’ll have to fulfill when the gift card is used.
Of course, when you CR an account, you have to Debit (DR) an account as well to make sure your books are balanced. Typically, you’ll DR a current asset account. We recommend debiting a payment clearing account. These types of accounts are used to record temporary transactions until they need to be posted to a permanent account. In this case, until payment is deposited in the bank.
We find that some people will CR sales when the payment comes through to the bank. This potentially duplicates the sales when the gift card is redeemed. Additionally, the payment clearing will not be zeroed out. When the payment has been deposited, allocate it to the payment clearing account so it will post a DR to the cash account and a CR to the clearing account.
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Do you charge taxes on gift cards?
In most regions, at the initial issuing of a gift card, tax is not charged. Tax is only charged when the gift card is used to purchase goods and/or services. Hence, tax should only be recorded in your books once. However, in some regions, such as in the UK, tax is actually recorded at the initial issuing of a gift card.
When the gift card is used, it becomes a sale
When a gift card is actually redeemed, we can then recognise a sales transaction. We can now CR the sales account, usually a revenue account, as well as CR the tax account, assuming you’re in a region where tax is recorded only once a gift card is used. This reduces the liability account for gift cards as the amount has been fulfilled. Hence, you DR your gift cards liability account.
What happens when products are returned?
In the scenario that someone returns an item that was purchased with a gift card, and you intend to increase their gift card value as a refund, you are increasing the liability owed. This means you need to CR the liability account for gift cards. The rest is handled the same way you would handle a normal refund.
How to automate accounting for gift cards
If this all sounds like too many steps to handle manually, you’ll be happy to know that you can actually automate this entire process, and for free! If you’re using Shopify and either Xero or QuickBooks Online, you can use Amaka’s Shopify + Xero, Shopify + MYOB or Shopify + QuickBooks Online accounting integration to automatically sync this data on a daily basis.
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If you want a thorough introduction into how you can spend less than an hour on your Shopify accounting every month, you can download the Complete Guide to Shopify Accounting entirely for free, no email required. The 54-page eBook goes through how to manage your books, understand your financial position, and draw insights that help you make better decisions.
What happens to gift cards that are no longer valid?
When a gift card is no longer valid, for example, it has reached the expiration date, you can recognise the amount as revenue. This step is called breakage. However, in some regions, there are escheatment laws that require the cash from unredeemed gift cards to be remitted to the government under certain circumstances. Double check what laws exist for you or look for an accounting professional.
Gift card fraud poses some risks
It’s important to quickly highlight the risks involved with offering gift cards. In the scenario that a thief gets access to the gift cards you’ve issued, and then redeems it at your store, you’ll be liable for reimbursing the defrauded customer, the person who actually purchased the gift card. Make sure strict records of gift card purchases are kept.
Key takeaways on accounting for gift cards
Ultimately, offering gift cards does create some extra steps in your accounting. However, using a gift card liability account makes it significantly easier to keep track of them all. If you’re using an Amaka accounting integration, you can have peace of mind that all steps are being accounted for automatically.