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How do I account for free gift cards?

We own a laundrymat and are giving away "loyalty cards". They are essentially free gift cards. We are putting $20 on the cards that customers can use for free washes & drys in our machines. This is a limited time promotional item. The customer then can add to these cards by putting money on these cards to make them like debit cards so they don't have to bring quarters to the store. My question is how to account for the free part. We have allocated 100 cards to this so we have $2,000 involved here. However, the cards were given to us by our supplier so no expense there and we have virtually no direct costs involved - obviously we have electricity, water, & natural gas. Our cost on a $5 wash is maybe 18 cents. I can see an argument for a $2,000 accrued liability but I don't see us as having a $2,000 expense so I don't know what our debit would be. Can someone help me out with the entries as to the initial setup of the cards and then as they play out?

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

If the cards (I assume the $20 portion) times out, and (I assume) they are non-refundable, and as you say the cost of 18 cents is actually recorded elsewhere, where is your liability or expense.

It would be akin to giving a free consult to a potential client. No revenue is recorded and the expense (assume consultant is on staff) is recorded elsewhere.

I'm sure someone will come up with an ASC that says you should, but it will have zero effect on your books.

Now for the additional money people put on the cards, that is a different story and needs to be recorded as deposits and unearned revenue (or similar accounts).

Guy Lowry
Title: Partner
Company: Starr Investments
(Partner, Starr Investments) |

Thanks for replying quickly. That's the way I was seeing it. The 18 cents I mentioned is the utilities (water, gas, etc) that are recorded as expenses when the bills come in monthly.

We're a new business so I wanted to do things correctly in case we get audited at some point so I would appreciate if anyone else thinks we need to do it another way to comply with either accounting standards or the law.

Yes, I'm just inquiring about the "free part". When they put their money on the card that comes to us and is, indeed, a different story and recorded differently.

Anonymous
(C2C Specialist) |

Your best and easiest bet is to have a reserve for the full $2K and then record it as earned revenue when the customer uses the machine or if the card value expires. The advantage of doing this is that when the customer reloads the card and uses it, you just do the same transaction.

Today when its free, Dr. 2K marketing expense, Cr. Deferred sales.

When its used, Dr. Deferred sales, Cr. Earned revenue.

When it expires, Dr. Deferred sales Cr. Other revenue.

Since you're a new firm it might be hard to estimate just how much of the 2K will be used. If you can estimate this, then you could setup a reserve for that amount.

If you do set things up differently for the free part then you'll have to have a way to know when a free wash was used vs. a wash the customer paid for and loaded on their card. This can be done if the two cards are different or if your system can differentiate between the two. Chances are that if you're small, your system is simple and you probably want something simple.

Anonymous
(Agent) |

I am experiencing something similar, but hesitant because wouldn't revenue be overstated if it is 'free'?

Ross Anderson, CPA, MBA
Title: Controller
Company: TFS Capital
(Controller, TFS Capital) |

I agree, it's not revenue, it's a liability.

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