8 Gift Card Accounting Practices Your Business Needs

Gift cards aren't just a way to bring a smile to your customers' faces—they're also an overlooked tool for generating additional revenue for your restaurant.  

However, the accounting process for gift card sales is a bit more confusing than your traditional restaurant billing. From managing unredeemed gift card balances to staying compliant with the latest regulations, you must master the process of gift card accounting. 

Our 2023 Restaurant Gift Card Sales Report revealed that global restaurant gift card sales exceeded $326 million in 2022. With this much profit at stake, we made this article on the best gift card accounting practices for your restaurant's growth. Dive in now to strengthen your restaurant gift card sales accounting processes! 

Why are Accurate Accounting Practices Necessary for Gift Card Management? 

Gift cards pose a unique set of challenges to your accounting processes. At first glance, they seem like straightforward transactions, but they can complicate your books in ways that many business owners overlook. 

Gift card sales are a form of deferred revenue, where you receive payment before delivering the goods or services. This deferred revenue creates a liability requires accurate management until the card is redeemed or expires. Failing to account for this properly can produce misstatements in your financial reports, potential compliance issues, and even lost revenue. 

Accurate gift card accounting is crucial for tax reporting. If not done right, misreporting can lead to penalties, fines, or even audits, all of which are costly and time-consuming. Don’t forget that both the perception and reality of your restaurant’s financial health is crucial for stakeholders, including any investors and lenders you work with, as well as your employees (who are arguably most important). 

Basics of Gift Card Accounting 

Understanding the basics of gift card accounting is essential to laying the groundwork for a well-established restaurant. By getting a good grasp on the fundamentals, you’ll find yourself in a much better position to market gift cards and handle transactions with ease and precision. 

How to Account for Gift Card Sales and Redemptions 

When you sell a gift card, it’s not yet time to celebrate its revenue—at least not in your accounting records. Here’s how it works: 

Initial Sale of Gift Card: When a gift card is sold, the cash received from the sale is recorded as deferred revenue, not as immediate income. This means the customer hasn’t received any goods or services yet.

Accounting Entry: 

• Debit: Cash/Bank 

• Credit: Deferred Revenue (Liability)

Redemption of Gift Card: When the customer uses the gift card, that’s when you recognize the revenue.

Accounting Entry: 

• Debit: Deferred Revenue (Liability) 

• Credit: Sales Revenue

Expiry of Gift Card: If a gift card expires without being redeemed, you can recognize the unredeemed amount as revenue, but only according to the breakage estimate policies your business follows.

Accounting Entry: 

• Debit: Deferred Revenue (Liability) 

• Credit: Sales Revenue (or Other Revenue, depending on your policy) 

Impact of Unredeemed Gift Cards on Financial Statements 

Unredeemed gift cards or gift card amounts, also known as breakage, present both an opportunity and a challenge for businesses. On one hand, gift card breakage accounting can represent additional revenue, as the liability associated with the unredeemed gift cards can eventually be recognized as income. On the other hand, estimating breakage accurately and recognizing it at the appropriate time requires a deep understanding of the applicable accounting rules and standards. 

The Financial Accounting Standards Board (FASB) has provided guidelines for recognizing breakage income. Generally, businesses are allowed to estimate the amount of breakage and recognize it as revenue over time based on historical data and other relevant factors. However, this must be done carefully to avoid premature or incorrect revenue recognition. 

To account for breakage, businesses can use the following approach: 

1. Estimate Breakage: Estimate the percentage of gift cards that will likely remain unredeemed based on historical data. 
2. Recognize Breakage Revenue: As gift cards are redeemed, a proportionate amount of the estimated breakage can be recognized as revenue. 

This method ensures that breakage is recognized systematically and aligns with the actual usage patterns of the gift cards. 

Generally Accepted Accounting Principles (GAAP) Guidelines for Gift Card Accounting 

When it comes to gift card accounting, Generally Accepted Accounting Principles (GAAP) provide the foundation for how transactions should be recorded, measured, presented, and disclosed. Under GAAP gift card accounting rules, gift cards are treated as a liability when sold, and revenue is recognized when the cards are redeemed or when the likelihood of redemption is considered remote (i.e., breakage).  

Imagine a restaurant chain that sells $100,000 worth of gift cards in December. GAAP guidelines require that the entire amount is recorded as deferred revenue. As customers redeem their cards, the restaurant will then gradually recognize this as revenue. Let’s take a look at what the main four GAAP Guidelines are for restaurant gift card sales: 

1. Revenue Recognition: According to GAAP, revenue should be recognized when it is earned and realizable. For gift cards, this means at the time of redemption or when breakage is reasonably assured. 
2. Fair Value Measurement: GAAP requires that gift card liabilities be measured at their fair value at the time of issuance. This value typically equals the amount paid for the gift card. 
3. Balance Sheet Presentation: Gift card liabilities should be presented as deferred revenue on the balance sheet until the card is redeemed or the breakage is recognized. 
4. Required Disclosures: Your financial statements must disclose significant policies related to gift card accounting, including your methods for estimating breakage and the timing of revenue recognition.

8 Gift Card Accounting Practices That Every Restaurant Owner Must Know 

Gift cards have become a popular way for restaurants to generate revenue and attract new customers. However, managing gift card transactions can be tricky if you’re not familiar with the accounting practices involved. Here are eight proven gift card accounting rules and practices every restaurant owner should know: 

1. Properly Record Gift Card Sales 

When a customer purchases a gift card, it’s important to remember that this transaction isn’t recognized as revenue just yet. Instead, it should be recorded as a liability on your balance sheet. The revenue is only recognized when the gift card is redeemed for goods or services. This ensures that your financial statements accurately reflect your business’s true earnings. 

2. Track Gift Card Liability Accurately 

As gift cards are sold, redeemed, or even expired, your liability will change. It’s crucial to keep an accurate and up-to-date record of your outstanding gift card liability. Regularly reconciling your gift card balance will help you avoid discrepancies and ensure that your financial records are precise. 

3. Handle Breakage Carefully 

Breakage refers to the percentage of gift cards that are sold but never redeemed. While it might be tempting to recognize this as immediate revenue, it’s important to handle breakage according to accounting standards. Typically, breakage can only be recognized as income when there’s a high probability that the card won’t be redeemed, and you have a reliable method for estimating this probability. 

4. Understand the Revenue Recognition Timing 

Revenue from gift cards should only be recognized when the gift card is actually redeemed, not when it’s sold. This means your income may be spread out over time, depending on when customers use their gift cards. Properly timing revenue recognition helps maintain accurate financial statements and avoid any legal or tax issues. 

5. Comply with State Escheatment Laws 

Some states have escheatment laws that require businesses to remit the value of unredeemed gift cards to the state after a certain period. It’s important to be familiar with the specific escheatment laws in your state to ensure compliance. Failure to adhere to these regulations can result in penalties or legal action. 

6. Implement a Robust Gift Card Management System 

Having a reliable system to manage gift cards is essential for managing your customers. This system should track sales, redemptions, and the remaining balance of each gift card. A good management system will integrate with your point-of-sale (POS) and accounting software, making it easier to keep everything organized and accurate. 

7. Monitor for Fraud and Abuse 

Gift cards are targets for fraud, so it’s important to monitor transactions closely. Look for patterns of abuse, such as multiple redemptions of the same card or large purchases with minimal redemptions. Implementing security measures, like requiring a PIN for redemption or limiting the number of cards that can be redeemed at once, can help protect your business from fraud. 

8. Regularly Review and Update Your Gift Card Policies 

Your gift card policies should be clear, consistent, and up-to-date. This includes terms related to expiration dates, fees, and how lost or stolen cards are handled. Clearly indicate the difference between comp cards and gift cards to avoid any legal penalties and loss of customer trust.

Frequently Asked Questions About Gift Card Accounting 

How do you account for gift cards? 

As a restaurant owner, you typically account for gift cards as deferred revenue when sold. When a customer purchases a gift card, you record it as a liability on your balance sheet because you haven't provided the meal or service yet. As the gift card is redeemed, you recognize the corresponding revenue.  

If a gift card goes unredeemed (breakage), you may recognize that as revenue after a certain period, based on your accounting policy. Make sure you track gift card balances and redemptions accurately to comply with financial reporting standards.

How do you account for gift cards to employees? 

When issuing gift cards to employees, such as for rewards or incentives, you treat the gift card as an expense. If it's part of an employee incentive program, it may be considered taxable income and must be included in the employee's wages. For payroll purposes, record the value of the gift card as a compensation expense when it’s given.  

You must also account for any applicable taxes, depending on local tax regulations, to ensure compliance. This expense is typically categorized under employee benefits or rewards in your financial records. 

How do I record a gift card in payroll? 

To record a gift card in payroll, treat it as part of an employee’s taxable compensation. If you issue a gift card as a bonus or incentive, include its value in the employee's wages for that pay period. 

Record the value of the gift card as a debit to the compensation expense account and credit it to the liability account, similar to how you would account for cash bonuses. Finally, ensure that any applicable payroll taxes (e.g., federal, state, and local) are applied to the value of the gift card as income. 

Are gift cards recorded as deferred revenue? 

Yes, gift cards are typically recorded as deferred revenue. When a customer buys a gift card, you recognize the payment as a liability on your balance sheet, as you have not yet provided the meal or service. You only recognize the revenue when the card is redeemed.  

If customers don’t redeem the gift card and it expires or becomes unlikely to be used, you can recognize that amount as revenue (known as breakage), based on your accounting policies and local regulations. This ensures accurate revenue reporting. 

What is the 92-day rule for deferred revenue? 

The 92-day rule for deferred revenue applies when accounting for unredeemed gift cards. If a gift card is not redeemed within 92 days, you may be allowed to recognize the deferred revenue as earned income. This rule is more useful when you have many unredeemed gift cards, allowing you to account for the breakage in a systematic way.  

Make sure you check local accounting standards and tax regulations to ensure compliance, as some jurisdictions may have specific rules around when and how you can recognize breakage revenue.

Boost Your Restaurant Gift Card Revenue 

Managing gift cards isn’t just a mundane, behind-the-scenes task; it’s a crucial part of running a successful restaurant. By following these eight essential gift card accounting practices, you’ll keep your books accurate, stay compliant with GAAP, and ultimately boost your profitability. 

But why stop there? To make managing your gift card program even easier, consider using our guest management software. It’s designed to simplify gift card transactions, automate key processes, and give you the insights needed to maximize your program’s effectiveness. 

With the right tools and practices in place, your gift card program can become a powerful driver of success for your business. Book a demo now to see how Paytronix makes restaurant gift card management simpler than ever.