Journal Entries for Gift Cards: How to Record Sales, Redemptions, and Breakage

What Are Gift Cards in Accounting?

Gift cards represent a promise to deliver goods or services in the future. When a business sells a gift card, it receives cash upfront but has not yet earned the revenue — it has an obligation to perform. Under both GAAP (ASC 606) and IFRS (IFRS 15), gift cards are treated as contract liabilities, not revenue, at the time of sale.

For accounting purposes, gift cards sit on the balance sheet as a current liability — typically in an account called "Gift Card Liability," "Unredeemed Gift Cards," or simply as part of deferred revenue. Revenue is recognized only when the card is redeemed, or when the likelihood of redemption becomes remote (breakage).

Journal Entry for Selling a Gift Card

When a customer purchases a gift card, the business receives cash but must record a liability. Here is the journal entry:

If a sales tax applies at the point of gift card sale (which varies by jurisdiction — some states tax the sale of the card, others tax the redemption), you would add a sales tax payable entry. Most jurisdictions, however, apply sales tax at redemption, not at purchase. The journal entry for sales tax on gift cards follows the same principles as any retail transaction.

Journal Entry for Redeeming a Gift Card

When the customer returns and uses the gift card, the business has fulfilled its performance obligation and can recognize revenue:

For jurisdictions where sales tax applies at redemption, the entry splits the liability between revenue and the tax authority:

The revenue recognized is the gift card value net of the sales tax component ($100 ÷ 1.08 = $92.59 for an 8% rate). The sales tax payable is remitted to the tax authority in the normal course.

Journal Entry for Gift Card Breakage

Not all gift cards get redeemed. The portion expected to go unused is called breakage. Under ASC 606, a business may recognize breakage income proportionally as gift cards are redeemed (the proportional method), or when the likelihood of redemption becomes remote. The breakage rate is typically based on historical redemption patterns.

Breakage income is typically classified as "Other Revenue" on the income statement. Some businesses net it against selling, general, and administrative expenses, but the better practice is to present it as a separate revenue line item for transparency. The journal entries for unearned revenue follow a similar pattern — both involve converting a liability into earned income as performance obligations are met.

Journal Entry for Gift Card Escheatment

In some jurisdictions, unclaimed property laws require businesses to remit the value of long-unredeemed gift cards to the state — a process called escheatment. The specific dormancy period varies by state (typically 3–5 years). When escheatment applies, the journal entry shifts the liability from "Gift Card Liability" to a payable to the state:

When the amount is remitted to the state, debit Escheatment Liability and credit Cash. The journal entry for cash receipts on the initial gift card sale documents the incoming cash flow.

GAAP vs. IFRS Treatment of Gift Cards

Both ASC 606 (GAAP) and IFRS 15 follow the same core principle: gift cards are contract liabilities until the performance obligation is satisfied. However, there are subtle differences in breakage recognition:

Aspect	ASC 606 (GAAP)	IFRS 15
Breakage recognition	Proportional to redemptions or when remote	Proportional to redemptions (required)
Escheatment	State-by-state rules; liability transfers to state	Jurisdiction-specific; not addressed in IFRS 15
Presentation	Current liability on balance sheet	Current liability on statement of financial position

Common Mistakes to Avoid

• Recording revenue at the point of gift card sale. This is the most common error. Gift card sales are not revenue — they are a liability until the card is redeemed or breakage is recognized.
• Forgetting sales tax on redemption. In jurisdictions where sales tax applies at redemption (not purchase), the full gift card value is not revenue — a portion belongs to the tax authority.
• Ignoring breakage entirely. If historical data shows 10–15% of gift cards go unredeemed, failing to recognize breakage income understates revenue and overstates liabilities.
• Not tracking gift cards individually. Without a system to track individual card balances, partial redemptions, and dormancy periods, reconciliation becomes nearly impossible at scale.
• Overlooking escheatment obligations. Failing to remit dormant gift card balances to the state can result in penalties and interest. Know your state's dormancy period and reporting requirements.

Frequently Asked Questions

Is a gift card a liability or revenue?

A gift card is a liability (not revenue) at the time of sale because the business still owes the customer goods or services. Revenue is recognized only when the card is redeemed or when breakage is recorded.

What account type is a gift card liability?

Gift Card Liability is a current liability account on the balance sheet. Some companies use "Unredeemed Gift Cards" or include it within Deferred Revenue.

How do you handle a gift card that has been outstanding for 5 years?

If the gift card does not expire (as is the case in many jurisdictions), it remains a liability. However, if escheatment laws apply, the balance must be remitted to the state after the dormancy period. If breakage is appropriate (the customer is unlikely to ever redeem the card), you can recognize breakage income per ASC 606.

Can you recognize breakage income on all unredeemed cards?

No. Breakage can only be recognized when redemption is deemed remote (under the remote method) or proportionally as redemptions occur (under the proportional method). You cannot write off the entire liability simply because cards are aging — there must be evidence that redemption is unlikely.