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How should the sale of gift certificates be recorded in the general ledger?

The sale of a gift certificate should be recorded with a debit to the asset account Cash and a credit to the liability account Gift Certificates Outstanding. (Revenue is not recorded until merchandise or services are provided to the customer.)

When a customer presents the gift certificate for merchandise or for services, the liability account Gift Certificates Outstanding will be reduced with a debit and a revenue account will be credited. If the revenue is a sale of merchandise, the income statement will match the cost of goods sold and other expenses with the revenue.

Our explanation pertains to financial accounting. To learn about the income tax treatment of this transaction, you need to ask a tax adviser or go to www.irs.gov.