Definition of Gift Certificates
Gift certificates (and gift cards) are often sold by a retailer to a buyer for cash. The buyer can then redeem the gift certificate or give it to another person who can redeem the gift certificate for merchandise or services.
Accounting for the Sale of Gift Certificates
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.
Note that revenue is not recorded at this point. Rather, the retailer is recording its obligation/liability to provide merchandise or services for the amount of the certificate sold.
Accounting for the Redemption of a Gift Certificate
When a gift certificate is presented to the retailer, revenue will be recorded by the retailer for the amount of merchandise or services that were provided. This is done with a debit to the liability account Gift Certificates Outstanding and a credit to a revenue account.
Our explanation pertains to financial accounting. To learn about the income tax treatment of this transaction, you should seek advice from a tax professional or go to www.irs.gov.