How to Account for Gift Certificates in Your eCommerce Store

 

Outside of catering to those who are hard to shop for, why would you want to issue gift certificates in you eCommerce business? The benefits from issuing gift certificates can include:

 

1. Increased sales. These cards can persuade buyers to make additional purchases when they are redeemed since the buyer is using “free” money.
2. Marketing opportunities. A gift card is a way to make an additional customer contact, and the more you are in contact with your customer, the better.
3. Cash flow and inventory management. You get the cash up front, and because gift certificates are purchased during the busy holiday season, you get the inventory smoothing of spreading the outflow of inventory over the course of the year.
4. Unexpected bonuses. Sometimes, the full value of the certificate never gets redeemed, meaning you can keep the cash.

 

So you decide you want to issue gift certificates. How does the accounting work for those? It is a little involved, but nothing that is beyond the capability of services like GoDaddy Bookkeeping to handle.

 

The important thing to remember here is that you haven’t actually sold anything yet. You basically have provided them with a promise to provide something at a future date in exchange for cash now. So you have created an obligation, as you have not actually sold anything yet. When you sell a customer a gift certificate, there is no effect on your income statement, and thus, no entry to enter into your bookkeeping records.  Now, when your customer would redeem the gift certificate, you would finally record the revenue for what you sold.  And of course you would record the cost of what you sold as cost of goods sold.

 

“Whoa,” you may be thinking, “what is the IRS going to say about not reporting an inflow of cash?” Just this year, the IRS released some guidance related to the sale of gift certificates. What they said was that you can defer recognizing income from when you sell a gift card until the year after the payment for the gift certificate is sold (if you get bored, you can take a look at Revenue Procedure 2013-29). However, you will need to recognize the income in the following year. So what you would want to do is set up an account within your bookkeeping income statement for gift certificate revenue to record any sales of merchandise purchased with a gift certificate.

 

So let’s say you sell someone a gift certificate this year (which would be 2013). You would not track of the gift certificates sold within GoDaddy Online Bookkeeping, but you can probably use a spreadsheet to keep a record of what you sell. When you sell something to a customer to whom you sold a gift certificate, you would need to record the amount of the sale in the gift certificate account. In the end of the following year, if you have any gift certificates that have not been redeemed, you will need to record in gift certificate revenue any money received for gift certificates in the prior year that was not redeemed by the end of that year (that would be 2014).

 

Confusing? If you have any questions, check with a good accountant who can walk you through all your options. It is better to understand all your options rather than making a rash decision about how to handle something. If you have a particular question, leave it in the comments.