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?
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It's not appropriate for a cash basis entity to try to post artificial Expense against Liability. it doesn't cost you anything. The eventual "sale" where the card is redeemed is essentially a Discounted sale. You need to speak with your own CPA for how this applies to your operations.
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