Do you have big plans for all of the money you received from selling gift cards and gift certificates over the holiday sales season? Not so fast—it’s not your money yet. You need a solid gift card accounting process.

A Brief History of Gift Cards

The gift card phenomenon began in the US about 30 years ago and has continued its upward trajectory ever since, topping $127 billion in 2016. Gift cards and certificates are popular in spas and salons, and why not? You can never provide too many massages or pedicures.

As an industry, we’ve had a long learning curve in how to market gift cards and gift certificates, and much has changed from a legal perspective. In the beginning, we sold paper gift certificates that said “massage” on them; clients would stuff them in a drawer and show up to redeem them three or more years later. Even though there may have been a couple of service price increases between when the gift certificate was issued and when it was redeemed, clients would still get their massages at the old price. Today, many states have amended their laws so that certificates never expire, and most businesses have moved from paper to plastic or online gift cards. But the model of a business receiving cash up front for a service yet to be delivered is still going strong.

I can remember when this craze really set in during the late 1980s. We couldn’t sell gift certificates fast enough! We rented extra computers and hired holiday help to manage the long lines of purchasers during the month of December. It felt like winning the lottery. After the dust settled, we would figure out how to best spend all of this cash: new carpeting, an updated piece of equipment, bonuses for the staff, etc. We knew it wasn’t really our money, but we also knew that a significant portion of those gift certificates would never be redeemed, so it felt safe. That is, until our weekly gift card redemption rate approached 50 percent of business, creating a cash scramble to meet payroll.

A Lesson in Gift Card Accounting

 

The lesson from the story above is that gift card revenue isn’t your money—it’s an indication that someone intends to do business with you in the future. When a recipient comes in to enjoy their Relaxation Massage or Scalp Treatment and Hairstyling, their gift card is just another payment method. As a consultant, I see a lot of income statements, and I’m surprised how often I see gift card sales listed under revenue, where they don’t belong. Let’s examine some of the accounting implications.

 

#1 Report Gift Cards as a Liability on the Income Statement

According to GAAP (Generally Accepted Accounting Principles), which is followed by most qualified accountants and bookkeepers, gift card and gift certificate sales should be recorded as a liability on your balance sheet; they shouldn’t show up on your income statement at all. The cash generated from the sales of gift cards should be put into an escrow account, separate from your regular bank account, that can be drawn upon as gift cards are redeemed. This is similar to what should happen in the sales of appointment series or packages.

Some accountants may handle gift cards differently, especially if your salon or spa is operating on a “Cash” rather than “Accrual” accounting method. According to Monte Zwang, Principal of Wellness Capital Management, some CPAs will leave gift certificate sales on the income statement of a Cash accounting business to more easily determine the net sold vs. redeemed revenue. Says Zwang, “I actually prefer to leave it on the balance sheet, even for Cash basis, so owners do not look at it as operating cash. If gift cards are recorded under revenue, as opposed to a Current Liability, you can’t look at your P&L and see how profitable you are. Sales is the money you are entitled to after you provide a service or sell a product. You will be overstating your sales if you record gift certificates as anything other than a Current Liability.”

#2 Review the Matching Principle for Gift Cards

As gift cards are redeemed, the supporting funds can be drawn out of the escrow account and put into regular checking, at least to the degree that redemptions outpace new purchases.  Lisa Neufeld, Operations Lead at Wellness Capital Management, adds that “outstanding liability on the balance sheet goes down, and cash goes up. At the same time, labor costs for performing service shows up on P&L and in the accounting world. You have just used the matching principle—matching revenue and expense in the period they actually occurred.” The services and products that are purchased with gift cards are recorded in revenue on the income statement, just like any other sale, so it’s entirely possible you won’t see the word “gift card” on your income statement at all.

#3 Unclaimed Property (Escheat) Laws and its Effect on Business Value

You should also be aware of your state’s laws on unclaimed property, or escheat. These laws provide a way for the state to recover some of the money lost if the gift card is not redeemed and a taxable sale is recorded. The federal CARD Act, which mostly pertains to credit cards, is an underlying statute, and each state has their own regulations regarding if and when any unredeemed gift card funds should be transferred to their coffers.

Obviously, you’ll want to handle your own accounting situation in a manner that is both legal and beneficial for your business. As Zwang says, “Leaving gift card sales on the balance sheet means the Income Statement will be a better tool to see how the business is operating throughout the year. That is what financial statements are for: to help clients make business decisions on a day-to-day basis, not to make it easy for the CPA to prepare the tax return!”

Remember that swelling gift card sales also mean swelling liability on your balance sheet. Should you ever want to sell your spa or salon, any potential buyer will look at that liability and want to know where the matching bank account asset is; if it doesn’t exist, your business value will shrink accordingly.

The Bottom Line

Gift card sales are an important tool to bring in new clients at certain times of the year, but they must be handled properly to keep your salon or spa financially healthy.

Do you need help finalizing a Gift Card Sales and Reporting Process? Contact us for a consultation.

 

 

A version of this post appeared first on Blog.Booker.com.