# An Accounting Question **URL:** \ **Category:** Factual Questions\ **Created:** [January 1, 2006, 9:01pm UTC](https://boards.straightdope.com/t/an-accounting-question/337990 "2006-01-01T21:01:13Z")\ **Posts on this page:** 14\ **Page:** 1
**Author:** ![cbarnes](https://avatars.discourse-cdn.com/v4/letter/c/a88e4f/32.png) [@cbarnes](https://boards.straightdope.com/u/cbarnes)\ **Post date:** [January 1, 2006, 9:01pm UTC](https://boards.straightdope.com/t/an-accounting-question/337990/1 "2006-01-01T21:01:13Z")
I have a question for the resident accountant dopers that, I imagine, has a fairly straightforward answer. When a store offers gift certificates or gift cards, how are those accounted for on the ledgers? This question struck me after seeing the enormous volume of gift certificates from the holidays. Thanks in advance! ~Chris ---
**Author:** ![nivlac](https://avatars.discourse-cdn.com/v4/letter/n/3bc359/32.png) [@nivlac](https://boards.straightdope.com/u/nivlac)\ **Post date:** [January 1, 2006, 9:30pm UTC](https://boards.straightdope.com/t/an-accounting-question/337990/2 "2006-01-01T21:30:50Z")
> [@cbarnes](#): > > I have a question for the resident accountant dopers that, I imagine, has a fairly straightforward answer. When a store offers gift certificates or gift cards, how are those accounted for on the ledgers? This question struck me after seeing the enormous volume of gift certificates from the holidays. Thanks in advance! > ~Chris Gift cards and such will have to go into the books as deferred revenue. It’ll get recognized when the gift card is actually used. As such, it’s on the balance sheet as a liability. ---
**Author:** ![wonky](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/wonky/32/393_2.png) [@wonky](https://boards.straightdope.com/u/wonky)\ **Post date:** [January 1, 2006, 9:32pm UTC](https://boards.straightdope.com/t/an-accounting-question/337990/3 "2006-01-01T21:32:09Z")
> [@nivlac](#): > > Gift cards and such will have to go into the books as deferred revenue. It’ll get recognized when the gift card is actually used. As such, it’s on the balance sheet as a liability. Why is it deferred? If I buy a gift card, my credit card is charged immediately. ---
**Author:** ![cbarnes](https://avatars.discourse-cdn.com/v4/letter/c/a88e4f/32.png) [@cbarnes](https://boards.straightdope.com/u/cbarnes)\ **Post date:** [January 1, 2006, 9:32pm UTC](https://boards.straightdope.com/t/an-accounting-question/337990/4 "2006-01-01T21:32:49Z")
> [@nivlac](#): > > Gift cards and such will have to go into the books as deferred revenue. It’ll get recognized when the gift card is actually used. As such, it’s on the balance sheet as a liability. Ha. I insisted that this was the case, but my father argued with me and was claiming that it actually was an asset. This struck me as entirely wrong. Thank you! ---
**Author:** ![Shagnasty](https://avatars.discourse-cdn.com/v4/letter/s/9dc877/32.png) [@Shagnasty](https://boards.straightdope.com/u/Shagnasty)\ **Post date:** [January 1, 2006, 9:38pm UTC](https://boards.straightdope.com/t/an-accounting-question/337990/5 "2006-01-01T21:38:32Z")
Of course, that brings up the question of where the money disappears to for gift cards and gift certificates that are never used fully? ---
**Author:** ![Gfactor](https://avatars.discourse-cdn.com/v4/letter/g/9de053/32.png) [@Gfactor](https://boards.straightdope.com/u/Gfactor)\ **Post date:** [January 1, 2006, 9:39pm UTC](https://boards.straightdope.com/t/an-accounting-question/337990/6 "2006-01-01T21:39:51Z")
Issues involving accounting for gift cards have been in the news this season: [Feds crack down on the accounting rules for gift cards](http://www.detnews.com/apps/pbcs.dll/article?AID=/20051230/BIZ/51229049/1001) [Gift cards give retailers headache](http://news.yahoo.com/s/nm/20051209/bs_nm/column_lifting_dc) > [@](#): > > This presents a tricky predicament for retailers. They get paid when gift cards are purchased, but technically they still owe something to consumers. That means merchants can’t officially book that revenue at the time of sale, but have to carry a liability on their balance sheets until the status of the cards change. > [@](#): > > During a recent accounting conference in Washington, Securities and Exchange Commission accounting fellow Pamela Schlosser said that should happen when the vendor is legally released from its obligation when the cards are redeemed or expire, when redemption becomes remote or when the company can “reasonably and objectively” estimate what percentage of its card sales will go unredeemed. ---
**Author:** ![Gfactor](https://avatars.discourse-cdn.com/v4/letter/g/9de053/32.png) [@Gfactor](https://boards.straightdope.com/u/Gfactor)\ **Post date:** [January 1, 2006, 9:47pm UTC](https://boards.straightdope.com/t/an-accounting-question/337990/7 "2006-01-01T21:47:18Z")
Here is an interesting discussion about unredeemed gift cards in states (like California) that do not permit gift cards to expire. [http://www.pwcglobal.com/gx/eng/about/ind/retail/0185\_quick\_briefs\_1204.pdf](http://www.pwcglobal.com/gx/eng/about/ind/retail/0185_quick_briefs_1204.pdf) (pdf) [http://www.pmalink.org/members/legal/bulletins/lawbulletin\_nov02.asp](http://www.pmalink.org/members/legal/bulletins/lawbulletin_nov02.asp) (has a discussion of state laws about gift cards that go unredeemed) **Shagnasty** , both of these items address your question to some extent. ---
**Author:** ![Freddy\_the\_Pig](https://avatars.discourse-cdn.com/v4/letter/f/a587f6/32.png) [@Freddy\_the\_Pig](https://boards.straightdope.com/u/Freddy_the_Pig)\ **Post date:** [January 2, 2006, 1:41am UTC](https://boards.straightdope.com/t/an-accounting-question/337990/8 "2006-01-02T01:41:04Z")
> [@jsgoddess](#): > > Why is it deferred? If I buy a gift card, my credit card is charged immediately. That just means that the company has gained control of an asset, cash. But they’ve also created a liability in the form of the certificate, with a value equal to the cash. If they were to recognize the revenue, they’d have to recognize an expense of the same amount. That wouldn’t be informative; it would make intrepretation of cost of goods sold and profit margin difficult and would invite manipulation for purposes of goosing revenue growth. So GAAP doesn’t allow it. You may say, “But surely the liability isn’t of equal value to the cash. When I redeem the certificate, the store will sell me something at a profit.” But you can’t know that. You may show up on the day they’re unloading something below cost to clean out inventory. They can’t guess at how much profit they’ll eventually make on the certificate, so they don’t try. The same is true with a contract that you prepay, such as your auto insurance. At the time you make payment, the insurer books the “unearned premium reserve” as a liability and recognizes the revenue gradually over the policy term. ---
**Author:** ![Gfactor](https://avatars.discourse-cdn.com/v4/letter/g/9de053/32.png) [@Gfactor](https://boards.straightdope.com/u/Gfactor)\ **Post date:** [January 2, 2006, 1:53am UTC](https://boards.straightdope.com/t/an-accounting-question/337990/9 "2006-01-02T01:53:01Z")
And even if the card expires unused, the retailer doesn’t necessarily get to keep the money. > [@](#): > > Many states require that unused amounts on gift certificates sold to consumers eventually be given to the state. > > A majority of states require sellers of gift certificates to “escheat” the remaining balance - to give the money to the state as unclaimed property. Although compliance with escheat laws for gift certificates has typically been fairly low, many states have started to look more closely at this potential source of revenue. [http://www.pmalink.org/members/legal/bulletins/lawbulletin\_nov02.asp](http://www.pmalink.org/members/legal/bulletins/lawbulletin_nov02.asp) ---
**Author:** ![jayjay](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/jayjay/32/6765_2.png) [@jayjay](https://boards.straightdope.com/u/jayjay)\ **Post date:** [January 2, 2006, 2:57am UTC](https://boards.straightdope.com/t/an-accounting-question/337990/10 "2006-01-02T02:57:57Z")
Why so complicated? What would be the problem with simply counting the gift card as the product sold? And that escheat thing doesn’t seem very fair…it’s not the store’s fault if the recipient of the gift card doesn’t or forgets to use it. ---
**Author:** ![Gfactor](https://avatars.discourse-cdn.com/v4/letter/g/9de053/32.png) [@Gfactor](https://boards.straightdope.com/u/Gfactor)\ **Post date:** [January 2, 2006, 3:08am UTC](https://boards.straightdope.com/t/an-accounting-question/337990/11 "2006-01-02T03:08:24Z")
> [@jayjay](#): > > Why so complicated? What would be the problem with simply counting the gift card as the product sold? What **Freddy the Pig** said. > [@](#): > > And that escheat thing doesn’t seem very fair…it’s not the store’s fault if the recipient of the gift card doesn’t or forgets to use it. > [@](#): > > States have long claimed the power of escheat over abandoned property, characterizing themselves as taking custody of the property from the holder of the property for the benefit of the property’s rightful owner. [More than you ever wanted to know about escheat law](http://winston.com/pdfs/fundamentals.pdf) ---
**Author:** ![Tastes\_of\_Chocolate](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/tastes_of_chocolate/32/3232_2.png) [@Tastes\_of\_Chocolate](https://boards.straightdope.com/u/Tastes_of_Chocolate)\ **Post date:** [January 3, 2006, 10:20pm UTC](https://boards.straightdope.com/t/an-accounting-question/337990/12 "2006-01-03T22:20:58Z")
Between the time that the gift card is paid for by me, and the time that it is redeemed, how is the money held? Is the company allowed to invest this pool of money and make interest off of it? ---
**Author:** ![Gfactor](https://avatars.discourse-cdn.com/v4/letter/g/9de053/32.png) [@Gfactor](https://boards.straightdope.com/u/Gfactor)\ **Post date:** [January 4, 2006, 12:34am UTC](https://boards.straightdope.com/t/an-accounting-question/337990/13 "2006-01-04T00:34:24Z")
> [@Tastes of Chocolate](#): > > Between the time that the gift card is paid for by me, and the time that it is redeemed, how is the money held? Is the company allowed to invest this pool of money and make interest off of it? I think the answer is yes. I am aware of no law requiring the retailer to sequester the money. IANAAccountant. This raises an interesting question though: > [@](#): > > Q.6. What happens if the seller of the gift certificate or gift card files bankruptcy? > > A. A gift certificate or gift card sold by a seller that seeks bankruptcy protection may have no value. However, the holder of the certificate or card may have a claim against the bankruptcy estate. > > Sellers that file “Chapter 11” (reorganization) bankruptcy intend to stay in business, so they typically will ask the bankruptcy court for permission of honor gift certificates in an effort to maintain good customer relations. > > If the bankruptcy court does not allow gift certificates or gift cards to be honored, of if the seller files “Chapter 7” (liquidation) bankruptcy, holders of gift certificates or gift cards are creditors in the bankruptcy case. They have relatively high priority among unsecured creditors in a Chapter 7 case, and may receive some percentage of the certificate’s or card’s value, but only if the bankruptcy estate has enough assets to pay claims. > > A recently-adopted California law is intended to help gift certificate and gift card holders when the seller declares bankruptcy. It requires a seller in bankruptcy to honor gift certificates issued before the date of the bankruptcy filing. No court has ruled on the effectiveness of this law. [http://www.dca.ca.gov/legal/s-11.htm](http://www.dca.ca.gov/legal/s-11.htm) Here is the statute referred to in the quoted material: > [@](#): > > 1749.6. (a) A gift certificate constitutes value held in trust by the issuer of the gift certificate on behalf of the beneficiary of the gift certificate. The value represented by the gift certificate belongs to the beneficiary, or to the legal representative of the beneficiary to the extent provided by law, and not to the issuer. > (b) An issuer of a gift certificate who is in bankruptcy shall continue to honor a gift certificate issued prior to the date of the bankruptcy filing on the grounds that the value of the gift certificate constitutes trust property of the beneficiary. > (c) (1) This section does not alter the terms of a gift certificate. The terms of a gift certificate may not make its redemption or other use invalid in the event of a bankruptcy. > (2) This section does not require, unless otherwise required by law, the issuer of a gift certificate to: > (A) Redeem a gift certificate for cash. > (B) Replace a gift certificate that has been lost or stolen. > (C) Maintain a separate account for the funds used to purchase the > gift certificate. > (d) (1) This section does not create an interest in favor of the beneficiary of the gift certificate in any specific property of the issuer. > (2) This section does not create a fiduciary or quasi-fiduciary relationship between the beneficiary of the gift certificates and the issuer, unless otherwise provided by law. > (3) The issuer of a gift certificate has no obligation to pay interest on the value of the gift certificate held in trust under this section, unless otherwise provided by law. > **[California Code, Civil Code - CIV § 1749.5 | FindLaw](https://codes.findlaw.com/ca/civil-code/civ-sect-1749-5.html)** > > California Civil Code CIV CA CIVIL Section 1749.5. Read the code on FindLaw [Washington state has adopted a similar statute](http://www.perkinscoie.com/content/ren/updates/mktg/040204.htm) These statutes attempt to make the gift certificate a trust. If the debtor in bankruptcy holds money in trust, the money can’t be reached by its creditors (because the money belongs to the beneficiary of the trust). [http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?court=9th&navby=case&no=9555423](http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?court=9th&navby=case&no=9555423) [The result is different for gift cards purchased after the bankruptcy petition is filed](http://www.oag.state.ny.us/press/2002/jan/jan18a_02.html). ---
**Author:** ![Agnostic\_Pagan](https://avatars.discourse-cdn.com/v4/letter/a/c4cdca/32.png) [@Agnostic\_Pagan](https://boards.straightdope.com/u/Agnostic_Pagan)\ **Post date:** [January 4, 2006, 2:53am UTC](https://boards.straightdope.com/t/an-accounting-question/337990/14 "2006-01-04T02:53:48Z")
> [@Tastes of Chocolate](#): > > Between the time that the gift card is paid for by me, and the time that it is redeemed, how is the money held? Is the company allowed to invest this pool of money and make interest off of it? We covered this in my accounting class as we had the same question. It is recorded as deferred revenue as others have already stated. The ability to pool this money is a primary reason why companies offer gift certificates. They are essentially recieving an interest-free loan from the consumer until the certificates are redeemed.\* For a company like Starbucks that pushes their cards heavily, it can add up to a good chunk of change. Which Wall Street likes as well of course. With the development of smart cards and the tracking systems they enable, the costs of running the program have decreased dramatically over the last few years according to my professor, and why almost every retailer now offers them. \*This may not hold true in every state though. Some may have special regulations concerning how the money is held, though I cannot think any examples off hand.