Is your company considering selling gift certificates or gift cards? Businesses large and small — from retail sellers to service providers — benefit in many ways when offering gift certificates. But it does cause additional complexities for the accounting books and financial statements. How so? Here is a short guide to what gift certificates do to your company's finances.
The Sale Creates a Liability
It seems counter-intuitive, but the sale of a gift card doesn't actually create a straight source of income on your books. Instead, the sale is recorded as an increase in cash but also as an increase in liabilities. When the gift certificate is redeemed, that money ceases to be a liability and is recorded as earned income.
Why is it a liability? Simply put, the customer did not actually buy any goods. What the customer did was to purchase the future right to receive goods of a certain value. The company has not yet earned this income by providing any goods or services in exchange for the certificate.
As prepaid income, the money from a certificate is not actually unrestricted. The company may have to return or replace the funds. In addition, unclaimed gift certificates must generally be reported to the state's unclaimed money account after a certain period of time. In short, the gift certificate value isn't completely guaranteed without restriction, so it is not simply earned income.
Gift Certificates Affect the Financials
Because gift certificates increase liabilities for a time, they do make your business' debts appear larger than they would otherwise be. If you have a lot of un-redeemed gift certificates, this might have a large effect. For instance, gift certificates purchased in the months leading up to Christmas are unlikely to be redeemed until after January 1 of the following year.
The good side of gift certificates is that they can also be a boost to sales. Often, a customer who presents a gift certificate buys items worth more than the certificate covers — meaning additional sales. There is also some breakage when a portion of the certificate goes unused. Even though breakage may not be returned to the company for some time, it will eventually add to the company's coffers.
If you do opt to sell gift certificates or cards, consult with an experienced business accountant before implementing your program. With this professional on your side, you will have the smoothest rollout and the most success in minimizing the downsides of gift certificates while maximizing the upsides.
For more information, contact a business accounting service in your area.
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