How do I account for gift cards and store credit that customers haven't used yet?

Why isn't money taken for a gift card income yet?

FASB's revenue standard, ASC 606, as quoted in Deloitte's Revenue Recognition Roadmap section on breakage, says that upon receipt of a prepayment from a customer a business recognizes a contract liability in the amount of the prepayment, and derecognizes it, recognizing revenue, when it transfers those goods or services.

On accrual books a card sale is therefore a liability, kept for example in a Gift card liability account and measured at what the customer paid (the face value, for a card sold at face). That is the book treatment; settle income-tax timing on the accrual method with your tax preparer. Booking the sale as income counts income before anything is supplied; booking it again at redemption counts it twice.

Where sales tax attaches is decided separately, and recording collected sales tax has its own guide; amounts below exclude it.

How do I record a card sale and its redemptions?

On accrual books, for a card you issue and whose money you keep, a customer buys a 100.00 card, spends 60.00 and never uses the other 40.00:

Step 3, month ends while unused, needs no entry; step 4 is one of the disposals shown under unused balances. The accounts move like this:

A customer with 25.00 left on a card buys 40.00 of goods and pays 15.00 in cash:

Revenue is 40.00, counted once. A full redemption is the same entry without the cash line. Post card sales and redemptions from register summaries the same way; getting a day's sales into the books has its own guide.

How is store credit issued on a return different?

Store credit given on a return settles an earlier sale rather than starting a new one. FASB's standard, as quoted in the Roadmap's section on variable consideration, lists a credit that can be applied against amounts owed among what a customer may receive on a return, and says revenue would not be recognized for the products expected to be returned. Under that guidance, those expected returns are recorded as a refund liability when the goods are sold. If you record that liability, issue the store credit out of it: debit Refund liability, credit Store credit liability. If you do not estimate returns, record a return of a 60.00 item bought last month for store credit when it happens:

Sales returns and allowances is a contra-revenue account deducted from Sales revenue, not an expense. When the credit is spent, debit Store credit liability and credit Sales revenue. Booking the credit as a new sale would overstate revenue and hide the reversal. Restocking and cash refunds follow the refund guide. Store credit can fall under different federal and state rules from purchased cards, as the sections below show.

What about promotional or bonus value nobody paid for?

Value handed out free is not a prepayment and is not carried as a liability. Deloitte's Roadmap section on vouchers, discounts and coupons concludes that where the customer does not enter into any enforceable commitment by picking up a voucher, no contract arises, and the voucher is treated as a price reduction when customers use it. A customer uses a free 10.00 promotional card on 50.00 of goods and pays 40.00 in cash:

Sales discounts is likewise a contra-revenue account, not an expense, so revenue from this sale is 40.00.

Bonus value given with a purchase differs. In the same section, Entity T determines that a gift card it gives free to buyers of its headphones is a material right, a separate performance obligation whose stand-alone selling price cannot be assumed to be the same as the price of a gift card purchased in isolation and reflects the likelihood that the option will be exercised. In another example there, revenue for vouchers given with a purchase is recognized when the product bought with them is transferred, taking into account the breakage guidance. Where the bonus gives the customer a material right it would not receive without the purchase, as Entity T determined in its example, credit the part of the price allocated to the bonus card to a separate Bonus card liability account, move it to revenue when the card is used, and release any share not expected to be used only under the breakage conditions below; settle with your accountant whether the bonus is a material right and, if so, how much to allocate.

What should the balance listing show, and how do I reconcile it?

A lump balance with no listing behind it cannot be proved, settle a dispute or support a disposal. Keep one line per card or credit, with these fields:

• Identity. Record the number, and the purchaser's and holder's names and addresses where collected, marking whose each is and when it was collected.
• Origin. Record whether it was sold, issued on a return (with the original sale's reference), free or a bonus.
• Issue. Record the date, face value, amount paid or allocated, issuing location and state, and any expiration date or fee printed on the card.
• Movements. Record each redemption's date, amount and sale reference, and any fee deducted.
• Contact and activity history. Record every event with its date and type: use, reload, balance inquiry in person, by phone or online, email or written contact, website or app login, fee and error correction. Keep the whole history, not one last-activity date, because each rule defines activity differently.
• Status. Record whether it is open, remitted to a named state or taken to breakage revenue, and when.

At each period end, reconcile in this order:

1. Total the open face balances of purchased cards and of return credits, and the allocated amounts still open on bonus cards; free promotional value is listed for tracking only and has no ledger balance.
2. Compare each total with its liability account at the same date.
3. Explain known differences: breakage already recognized under the proportional approach, supported by a running schedule, and cards sold below face value, which are carried at the amount paid.
4. Treat only the unexplained remainder as an error, such as a card sale posted to sales or a missed redemption: trace it, correct the wrong record and keep the support.
5. File the reconciliation with the period's records.

If no listing exists, rebuild one from your card system's or register's history before trusting the ledger. Leave any amount you cannot trace to a card in the liability, since it may still be owed to a customer or a state.

What can happen to a balance that is never used?

Only one outcome applies to a balance, and each needs something established first:

Why can't I pick a date to write it off?

FASB's standard, as quoted in the Roadmap's breakage section, calls customers' unexercised rights breakage. You recognize a liability, and not revenue, for any amount you are required to remit to another party, for example a government entity in accordance with applicable unclaimed property laws. For the rest, if you expect to be entitled to breakage, you recognize the expected breakage amount as revenue in proportion to the pattern of rights exercised by the customer; if not, you recognize it when the likelihood of the customer exercising its remaining rights becomes remote. Expected entitlement is judged under the standard's guidance on constraining estimates of variable consideration, which the Roadmap's variable consideration section quotes as allowing an estimate only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The breakage section adds that entities should not recognize breakage as revenue immediately upon the receipt of payment, even with historical evidence that some cards will go unused.

So timing is not your choice: clearing balances on a date you pick can overstate income and wipe out value owed to a customer or a state. If a state claims the example card's 40.00:

If instead no state is entitled and the breakage conditions are met:

Entry 4b shows the remote approach; the proportional approach recognizes expected breakage alongside each redemption instead.

Which state's rules apply, and what must I track?

With customers or locations in several states, decide this per balance rather than assuming your home state. The New York State Comptroller's Handbook for Reporters of Unclaimed Funds sets out priority rules from the U.S. Supreme Court's Texas v. New Jersey decision: property is remitted to the state of the owner's last known address, and if there is no address or the owner is unknown, to the holder's state of incorporation. Its reach-back criteria for voluntary compliance list accounts payable and receivable credits, including merchandise credits and gift certificates, with a 5-year dormancy, and add that accounts payable and receivable credits, including merchandise credits, issued after 2011 have a dormancy period of 3 years. The handbook does not say whether the 3-year period covers gift certificates; a New York holder should confirm that with the Comptroller's Office of Unclaimed Funds before relying on either figure. Check every state that could be entitled, including whether store credit and free promotional value are reportable there, before carrying any balance indefinitely or taking it to breakage.

For each balance, keep the listing's identity, issue and activity fields and record your state of incorporation or organization (New York's handbook speaks of reporting organizations incorporated, chartered or organized in New York); if you are unincorporated, ask the state authority which state it treats as yours. Which person a state treats as the owner is for its own rules. The New York handbook lists telephone or verbal contact, and internal activity such as service charges, among scenarios that do not eliminate the need to report, so in New York neither a phone call nor a fee posting stops a balance being reportable. It refers the telephone item to its Electronic Contact section; read that section before treating electronic contact as activity. Each state's own procedure governs any report and payment.

What limits apply to expiry dates and dormancy or service fees?

The CFPB's Regulation E section 1005.20 covers gift certificates and store gift cards, as it defines them, sold to a consumer on or after August 22, 2010, primarily for personal, family, or household purposes, including cards a business buys for redistribution or resale to consumers for those purposes. It bars a dormancy, inactivity or service fee unless there has been no activity in the one-year period ending on the date the fee is imposed; the card states clearly and conspicuously the fee's amount, how often it may be assessed, and that it may be assessed for inactivity; and not more than one such fee is imposed in any calendar month. Its official interpretation bars accumulating fees for earlier periods into one fee.

It bars selling or issuing a card with an expiration date unless the seller has policies and procedures giving consumers a reasonable opportunity to buy one with at least five years remaining until its expiration date; the underlying funds expire no earlier than the later of five years after the certificate was issued or funds were last loaded, and the card's own expiration date; the card carries the disclosures the rule lists; and no fee is charged for replacing the card, or for providing the remaining balance another way, before the funds expire, unless it was lost or stolen. Fee and expiration terms must be disclosed before purchase and may not be changed after purchase.

Its exclusions include loyalty, award or promotional gift cards that carry the disclosures the rule lists; cards not marketed to the general public, which its interpretation applies to a prepaid card issued after a merchandise return that clearly indicates it holds store credit, where refunds by prepaid card are not advertised to the general public; and cards issued in paper form only, which does not include a code or certificate provided electronically, even if the customer prints it.

California's Civil Code section 1749.5, in the text operative from April 1, 2026, which replaced a repealed earlier version, makes it unlawful to sell a gift certificate containing an expiration date or a service fee, including a dormancy fee, and says one sold without an expiration date is valid until redeemed or replaced. The section does not apply to certificates issued on or after January 1, 1998 whose expiration date appears in capital letters in at least 10-point font on the front and that are distributed free under an awards, loyalty or promotional program; donated or sold below face value at a volume discount to an employer or a nonprofit or charitable organization for fundraising, with an expiration date not more than 30 days after sale; or issued for perishable food products. Its service-fee ban applies only to certificates issued on or after January 1, 2004, and allows a dormancy fee on a gift card only when the remaining value is five dollars or less each time the fee is assessed, the fee does not exceed one dollar a month, there has been no activity (including purchases, adding value or balance inquiries) for 24 consecutive months, the holder may reload the card, and a statement printed on the card in at least 10-point font, visible to a purchaser before purchase, gives the fee's amount, how often it occurs, that inactivity triggers it and when it will be charged. State law can restrict expiry dates and fees beyond Regulation E, as California's does: before relying on an expiry date or deducting a fee, check the law of each state where you sell or issue cards and, for California certificates sold before April 1, 2026, confirm with your adviser which version governs.

A printed expiry date does not by itself move a balance to income: where the funds cannot lawfully expire, or state law keeps the card valid until redeemed, the value stays in the liability until it is redeemed, remitted or taken to breakage under the conditions above. Deduct a fee only where every condition of each applicable rule is met; show it on the listing and post the same amount out of the liability so the two still agree, and ask your accountant how to classify it.

What changes on cash-basis books?

For tax, the IRS's Publication 538 says that under the cash method you include in your gross income all items of income you actually or constructively received during the tax year. It also says that generally, if you produce, purchase, or sell merchandise, you must keep an inventory and use an accrual method for sales and purchases of merchandise, with exceptions including one for small business taxpayers; confirm with your tax preparer that the cash method is open to you. On cash-basis books kept to match the tax cash method, entries follow the same timing:

The example card reaches income once, as 100.00 at the sale. Where your register records a redemption as a sale paid by gift card, post the gift-card tender as a debit to Card sales income. For the example's 60.00 redemption:

Income still totals 100.00, and the listing falls by 60.00. For a purchase paid partly by card, only the card part goes to Card sales income. If your register posts store credit issued on a return and store credit spent, post both through one Store credit clearing account so that together they add or remove no income. Keep the listing anyway, since the balances are still owed: each period, check that its opening total plus card sales and other issues, less redemptions and other reductions, equals its closing total. Settle with your tax preparer how a later remittance to a state is treated before recording it.

What if a third-party program holds the funds?

Read your agreement with the program operator for who collects and holds the money and who must honor the card. If the money reaches you at the sale and you honor the card, record it as above for your basis and also reconcile your listing to the operator's balance records. If the operator collects and holds the money, settle with your accountant whether you carry any obligation for the card before making any entry. Meanwhile, each period obtain the balance and settlement reports your agreement provides and reconcile them to your own records: check the value redeemed at your locations against your sales, and settlements received against your bank deposits. Keep the operator's reports with your listing, or in its place if the operator holds the card-level balances. Your agreement and the operator's own documentation set what the operator holds and reports.

For tax under the cash method, Publication 538's constructive-receipt rule says that if you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives it. For New York, the Comptroller's handbook says that when property is held by a third-party holder, the issuer's corporate status, not the third-party holder's, is the determining factor for property held for foreign owners and unknowns.

Which records support the balance and any disposal?

Keep these records, each for the purpose shown:

• Issue records. Receipts, return records, promotional logs and each card design's printed terms show how a balance arose and support any expiry or fee.
• Redemption and activity history. Card-level transactions and dated contacts show each move to revenue, settle disputes and support each state's dormancy test.
• Breakage support. Redemption data and the estimate behind any breakage revenue show the accounting conditions were met.
• State determinations. The state identified for each balance, with the address, location and rule relied on, shows why it was remitted, carried or taken to revenue.
• Reports and payments. Copies of state reports and proof of payment close remitted balances.

The New York handbook requires organizations other than brokers or dealers to retain books and records relating to abandoned property they remit to New York.