I have several restaurant clients who regularly donate Gift Certificates as promotional GC or as donations for fund raisers/community help, etc. The GC is recorded in a Liability account until it is redeemed and expensed as a Promo GC. It's the same GC Liability Account as GC that are "sold" to customers. When the GC is redeemed, the food and beverage is recorded as sales income which cancels out the Promo GC expense - we are now at Net "0". How can I enter this differently so I can actually take a deduction/expense for the Promo GC?
I am not an accountant, and I am sure there are others here in the community who can offer their knowledge on the matter, but I'm not sure you can expense something that is donated to your business.
I may be totally off, but wouldn't that mean double counting the asset's value?
I would definitely reach out to your accountant for that.
If they were a donation to you, I agree with James.
If not then Janes, you are correct if you are the one giving the GC, it should be on a liability account.
Since the GC has a money value that will decrease your income, and since you are not getting money for the GC, it is to account for an expense, but you should not be categorized as income at redemption. Instead, you should be categorizing the redemption of the GC, as a Charity Expense, and every time these are redeemed your liability account should decrease by that amount until you reach 0 ones all GCs are redeemed. Then you will have your total of Charity Expense.
Now if these were to be sold it is a liability that increases with each sale, and it also increases Income at the time of sale, the income should be record at the time of sale, and when the GC is redeemed it should only be recorded as a decrease to the GC liability account. Hope this makes sense.
This is really good feedback and pretty complex. Since @janes is donating these as expenses to the business, sounds like they need to set up a liability account specifically for the GC and make a journal entry every time a card is redeemed until the account reaches 0? That way, there is a clear record, opening liability amount (total of all the donated GC), and a manageable workflow that can be easily reported.
@girlFRIDAY, you've worked with a ton of restaurants, how do they usually account for GC?
I have been trying to figure this out myself and would love any feedback on this guide I wrote to help me handle these situations. The only thing that seems off to me is that the Credit Memo for donating the Gift Certificate reduces income ahead of when the "sale" is made and the GC is redeemed.
"Gift Certificates we donate to organizations are essentially a discount
and in the end the amount reduces our product sales income amounts.
But if they are given (or purchased) prior to when they are redeemed they need to become a liability.
That way we know the value of the gift certificates we have floating out there in the world.
To do this we:
"Sell” the organization the item in an Invoice using “Gift Certificate – Donated” for the amount we are donating. This creates a Liability entry in the Gift Certificates Sold account.
"Pay” that invoice with a donation to make the Invoice read zero (0.00), because they don't owe us money, we make a Credit Memo using the “Donation” item and it will account for the income we are missing out on by donating the GC in “Uncatagorized income”, reducing our potential sales income, effectively like a discount making income smaller. (as we don't have a "Gift Certificates Sold" Income account, it's a Liability Account.
Items that are to be purchased are added to a new Invoice or Sales Receipt. (Increases Income from product price which was already reduced by Credit Memo amount.)
Redeem with “Gift Certificate – Donated” item with a negative amount to create a negative Liability entry in the Gift Certificates Sold account to reduce our liability for the amount of GC we have out in the world that can be redeemed.
So the donated Gift Certificates aren't seen exactly as an Expense, but they are a reduction in sales income, which is the same thing in my business (I think?).... the donation will reduce gross profit.
If a GC were going to be Donated and Redeemed in the same Sales Receipt it could just be entered as a Discount because it doesn't have to go in and out of the GC Liability account. If they only redeemed part of it, the sale would need to be entered as an Invoice and the amount redeemed could be the discount and then the remainder would be Gift Certificate- Donated that you would make a new GC for and give to the customer as “change”. The balance on the Invoice would then have a Credit Memo applied to it, with the item “Donation”.
does my logic check out here?