Bookkeeping · Daily Workflows · Brief · Working level
Gift card accounting: selling, redeeming, and breakage
Selling a gift card creates a liability, not a sale; revenue happens at redemption. The entries for both moments, and breakage — the cards that never come back — in plain terms.
A gift card is a small loan from your customer: they hand you cash now, you owe them merchandise later. So the sale of the card is not a sale at all on your books — it credits a liability, "gift cards outstanding," and revenue waits for the moment of redemption. The third act, breakage, covers the honest question every card program raises: what about the cards that never come back?
Selling the card
| Account | Debit | Credit |
|---|---|---|
| Cash — operating checking | 100 | |
| Gift cards outstanding (liability) | 100 |
No revenue, no sales tax — nothing has been sold yet except a promise. Sales tax attaches at redemption, when actual goods change hands.
Redeeming the card
The customer later buys $64 of goods with the card:
| Account | Debit | Credit |
|---|---|---|
| Gift cards outstanding | 64 | |
| Sales revenue | 64 |
Cash is absent — it came in at issuance. Sales tax collected at redemption would credit its own liability line. The card's remaining $36 stays in the liability.
A good POS system maintains the card ledger for you; the bookkeeping job is reconciling the POS's outstanding-card total to the liability account monthly, the same way you reconcile a bank account. This is the same collect-now-earn-later pattern as customer deposits — money in hand, revenue deferred until performance.
Breakage, in plain terms
Some fraction of gift card value is never redeemed — industry experience commonly runs in the mid-single digits to around 10%. Carried literally, those dead balances sit in the liability forever, overstating what you owe. The accounting answer is a breakage policy: if your redemption history supports an estimate (say, 6% of issued value never comes back), you recognize that expected breakage as other income in proportion to actual redemptions, rather than all at once or never. A small shop without data can use the simpler, more conservative approach: hold balances until redemption becomes remote by policy — commonly measured in years of inactivity — then move them to income with a dated memo explaining the basis.
| Account | Debit | Credit |
|---|---|---|
| Gift cards outstanding | 120 | |
| Gift card breakage income | 120 |
Post from a written policy and a card-level list — never by deleting balances. The memo is the audit trail.
The monthly check
- Reconcile the POS outstanding-card report to the gift-card liability balance.
- Investigate gaps — usually a redemption rung as a cash sale (double-counting revenue) or a card sold outside the POS.
- Review dormant balances against your breakage policy and your state's escheat rules.
- Keep card sales out of the sales-tax base at issuance; tax attaches at redemption.
Promotional cards given away free are a different animal — no cash arrived, so issuing one books a marketing expense against the liability at expected cost, not face value. If your program is large enough for that to matter, it is large enough to put the policy in writing.
Frequently asked questions
- Is selling a gift card revenue?
- Not on your books. Selling a $100 gift card means you now owe someone $100 of goods or services — a liability, usually called gift cards outstanding. Revenue is recognized when the card is redeemed. For taxes, advance payments like gift card sales are generally income earlier — often when received or under a one-year deferral — so books and return can differ.
- What is breakage in gift card accounting?
- Breakage is the portion of gift card balances that will never be redeemed — cards lost, forgotten, or left with small remainders. Businesses that track redemption history may recognize expected breakage as income proportionally as cards are used, rather than carrying dead balances as liabilities forever. State unclaimed-property laws can require remitting some unredeemed balances instead.
- What is the journal entry when a customer pays with a gift card?
- Debit the gift cards outstanding liability and credit sales for the amount redeemed. No cash line — the cash arrived when the card was sold. If the purchase exceeds the card balance, the remainder is a normal cash or card sale on the same ticket.