Why are gift cards considered deferred revenue instead of revenue?

So, how should gift cards be accounted for? When a gift card is purchased, your company should not record revenue; instead, the purchase of the gift card is recorded as a liability because you have an obligation to provide services or goods at a later point in time.

Are gift cards considered deferred revenue?

The sale of a gift card is generally deferred from revenue recognition until the redemption of the gift card for financial reporting purposes. However, for federal income tax purposes, the deferral of gift card sales is limited to either a one-year deferral or a two-year deferral.

Do gift cards count as revenue?

To keep it simple, call it something like Gift Cards. This sale does not count towards your revenue yet, because it is a gift card liability until the card is used. At that point, your revenue is recorded and counts as a transaction sale.

How are gift cards recorded in accounting?

The sale of a gift certificate should be recorded with a debit to Cash and a credit to a liability account such as Gift Certificates Outstanding. Rather, the retailer is recording its obligation/liability to provide merchandise or services for the amount of the certificate sold.

At what point should the revenue from the gift cards be recognized?

When a company sells a gift card, the cash it receives is recognized as a liability until the gift card is redeemed for goods or services. Upon redemption, then the company reverses the liability and recognizes the revenue.

What type of liability are gift cards?

You need to record gift card sales as liabilities for deferred revenue. To explain, a liability is a debt or a future obligation. When your client sold the gift card, the retailer or service provider created a future obligation to provide their customers with products or services worth the value of the gift card.

Is unearned revenue a liability?

Unearned revenue is recorded on a company’s balance sheet as a liability. It is treated as a liability because the revenue has still not been earned and represents products or services owed to a customer.

Why are unredeemed gift cards a liability?

Unredeemed gift cards represent liabilities related to unearned income and are recorded at their expected redemption value. No revenue is recognized in connection with the point-of-sale transaction when gift cards are sold.

Are gift cards unearned revenue?

Financially, a gift card is essentially an interest-free loan from the consumer to the retailer. In accounting terms, the funds received from customers amount to unearned revenues, a liability.

Where does unearned revenue go on a balance sheet?

Unearned revenue is listed under “current liabilities.” It is part of the total current liabilities as well as total liabilities. On a balance sheet, assets must always equal equity plus liabilities.

Where do you put unearned revenue on a balance sheet?

Unearned revenue is included on the balance sheet. Because it is money you possess but have not yet earned, it’s considered a liability and is included in the current liability section of the balance sheet.

Is unearned revenue considered revenue?

It is recorded on a company’s balance sheet as a liability because it represents a debt owed to the customer. Once the product or service is delivered, unearned revenue becomes revenue on the income statement.