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!
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).
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.
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:
Redemption of Gift Card: When the customer uses the gift card, that’s when you recognize the revenue.
Accounting Entry:
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:
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:
This method ensures that breakage is recognized systematically and aligns with the actual usage patterns of the gift cards.
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:
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.
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.