Do your clients sell gift cards, issue them for promotional events, or give them to their employees as rewards? If you handle the books for any retailers or even service providers, the answer is likely yes. And to take care of these clients, you need to understand gift card accounting.
Recording Gift Card Sales
When your clients sell gift cards, they have the money in hand, and presumably, that means you should just record the sale as usual, right? Actually, no. You need to record gift card sales as liabilities for deferred revenue.
To explain, a liability is a debt or a future obligation. When your client sold the gift card, the retailer or service provider created a future obligation to provide their customers with products or services worth the value of the gift card. Deferred revenue means you wait until you count the funds — or in more easily understood language, the time when your client’s customer trades the gift card for goods or services. To illustrate how this works, imagine your client sells a gift card for $100. To record the transaction, you note $100 as a credit in the gift card deferred revenue category. If you use double-entry bookkeeping, you also note the gift card’s sale as a debit in the cash column. Then, let’s say the customer uses $80 of the gift card to purchase some products from your client. At that point, you debit the gift card deferred revenue column for $80. If this is the only gift card on the books, the total in that column drops to $20. To balance the books, you also record the $80 in the sales or revenue account as a credit.
Estimating Gift Card Breakage or Forfeiture
Imagine the customer in the above example never returns to your client’s shop, and the remaining $20 gift card balance remains forever. This happens a lot, and it’s referred to as breakage or forfeiture. Ideally, it’s a good idea for you to estimate your client’s breakage or forfeiture as you account for the gift cards. That helps to keep all the numbers as accurate as possible. Typically, you can account for breakage by looking at trends from previous reporting periods. For instance, if your clients sold $1,000 in gift cards last year and only redeemed $800, the breakage rate is 20%. Because you know a portion of all sold gift cards is likely to remain unused, you can account for those amounts immediately. If your client sells a $200 gift card, you might note $160 in current liabilities and then put the other 20% of the gift card’s value straight into the revenue column. To ensure the accuracy of the numbers, it’s beneficial for you to recalculate the breakage rate every reporting period.
Staying Compliant with Gift Card Laws
Accounting for gift card sales is just the first step. You also want to ensure your clients are compliant with Canada’s Gift Card Act. This set of laws details:
- Rules on fees
- Expiration dates
- Other gift card essentials
On top of that, there are specific provincial and territorial rules your clients may need to follow. For example, in New Brunswick, you can’t charge fees for using gift cards unless the fee is for personalizing the gift card or replacing it, but you can charge dormancy fees for multi-store gift cards. Similarly, Ontario has unique rules for multi-store or mall gift cards. To help your clients, you may want to check out the exact rules in their area.
Giving Gift Cards to Employees
Gift cards are a popular gift idea because they allow the recipient to choose their own gift, and by extension, you don’t have to figure out what the other person likes. Your clients may want to give their employees gift cards for this very reason. But the Canada Revenue Agency (CRA) regulates bonuses and giving employees gift cards as a gift, and your clients need to understand the taxation and reporting rules.
Basically, if your clients give their employees gift cards as bonuses, it’s the same as giving out cash. That applies regardless of whether the gift card is for your client’s business or for another business. The employee has to pay income tax on the value of the card, Employment Insurance premiums (EI), and Canada Pension Plan (CPP) contributions on the value of the gift card. And of course, your client has to pay its share of EI and CPP as well. To avoid this, your clients may want to hand out cash bonuses or buy material gifts. If your clients still want to hand out gift cards, make sure you account for the gift cards correctly when doing payroll. But if you understand the above rules, that process goes smoothly.
Business Benefits of Gift Cards
Gift cards are nearly ubiquitous. Businesses of all sizes give them out to customers, charities, and employees. Although accounting for gift cards is tricky, it’s worth it for most of your clients. Thanks to the forfeiture rate, gift cards help improve your client’s bottom line. On top of that, gift cards can provide an effective tool to get new customers into a store. In fact, your clients may want to take advantage of this angle by encouraging their regular shoppers to buy gift cards for their friends and family. Gift cards are also ideal for donating to charities that may, in turn, use them as door prizes or sell them for fundraisers. It helps with your client’s public image, but again, it also helps to bring new people through the doors or to your client’s website.
QuickBooks Online Accountant offers powerful tools for accounting professionals. Sign up for free.