What it means
When a customer purchases a gift card, your business receives cash immediately. However, under standard accounting rules, you cannot record this cash as revenue right away.
Because you still owe the customer a product or service, the money goes onto your balance sheet as a liability, often called unearned revenue or deferred revenue. This liability decreases only when the customer eventually redeems the gift card to make a purchase.
At that exact moment, the balance moves from the balance sheet onto the income statement as actual earned revenue. Tracking this accurately is vital for non-finance managers because mismanaging it can give a false impression of your monthly profit.
If you spend gift card cash before the card is used, you risk running into severe cash flow shortages when customers return to redeem their cards all at once, such as during the holiday shopping season. Furthermore, many gift cards go partially or fully unused over time.
This leftover amount is known as breakage. Depending on local tax laws and regulations, businesses can often recognise this breakage as revenue after a specific period of inactivity, boosting their overall financial results legally and predictably.
In practice
Real-world examples.
Example
Coffee shop owner Sarah sells one hundred fifty pounds worth of gift cards in December. She logs this as a gift card liability, keeping the cash safely set aside until customers buy lattes in January.
Example
A boutique clothing shop issues fifty-pound digital gift vouchers for birthdays. The finance manager ensures this money stays off the monthly sales report until the clothing is actually taken off the rails.
Example
An independent book publisher sells online gift tokens worth five hundred pounds total. They monitor the unspent balance carefully to ensure cash reserves match their future delivery obligations.
Think of it
“Imagine buying a ticket for a theme park ride. The park takes your money now, but they owe you a ride. Until you actually get on the rollercoaster, that money sits in their books as an outstanding promise.
Formula
Calculation
Opening Liability + New Gift Card Sales - Redemptions - Breakage = Closing Liability. Example: Zero opening liability plus one thousand pounds in sales, minus six hundred pounds redeemed and fifty pounds of breakage, leaves three hundred fifty pounds in liability.Case study
Seen in the real world.
Oak Tree Spa launched a holiday gift card campaign, selling two thousand pounds worth of vouchers in November. The operations manager incorrectly celebrated this entire sum as November profit, using the cash to buy new equipment. In January, local clients arrived to redeem twelve hundred pounds of those spa vouchers. Because the cash was already spent, Oak Tree Spa faced an unexpected cash crunch and had to delay supplier payments. The owner quickly consulted an accountant to set up a proper gift card liability tracking system. They learned to keep sixty percent of all gift card receipts in a separate reserve account to cover upcoming treatments. By February, the spa stabilised its finances, ensuring that future gift card sales were treated strictly as liabilities until the treatments actually took place, protecting the business from sudden cash shortages.
Watch out
Common mistakes.
- Recording gift card sales as immediate revenue instead of a liability.
- Forgetting to account for breakage income when cards expire or remain unused.
- Spending the cash collected from gift card sales before the cards are redeemed.
Questions
People also ask.
Why is a gift card considered a liability?
It is a liability because the business has a legal obligation to provide goods or services in the future for money already collected.
What happens to gift cards that are never used?
Unused balances, known as breakage, can often be recognised as company revenue after a set period, depending on regional regulations.
Does selling gift cards improve my monthly profit?
No. Selling gift cards boosts your cash balance, but profit is only recorded when the customer actually redeems the card for goods or services.
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