If a business gives some of their new customers free gift cards how does this impact the books?
e.g. Free $10.00 gift cards to the first 100 customers at the grand opening of a restaurant.
Can anyone inform how the journal entry would look?
You would/could debit promotion and credit sales. This keeps the Sales/Cost of Sales from being distorted and actually tracks what you are spending on Promotion.
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How about debit Promotions and credit a current liability account: Gift Cards?
It’s not a sale until the customer presents the card. A customer may only order coffee for 5 bucks so there is still $ on the gift card UNLESS the card expires the same day as the grand opening. A customer may not use it that day but gifts it to someone else.
Or maybe the cards can’t be used the day of the grand opening.
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An unpaid-for gift card is recorded as a promo expense at the time of actual usage - offsetting the sale as recorded. (ie Dr Promo, Cr GST/HST/Sales). Until then it’s a “nothing” (client has no idea if it will be used or not). In a retail circumstance many simply ignore this…it’s basically eaten out of COGS.
As a side note: unpaid-for (ie promotional) cards may have an expiry date.
Many (maybe all?) provinces now have laws that ban expiry dates on paid-for cards. Those are a liability of the business (ie Dr Cash, Cr G/C o/s) at the time of purchase, and are a reduction of such liability (Dr G/C o/s, Cr GST/HST/Sales as needed) at the time of usage.
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There is NO SALE to associate to a Gift Card, until it is redeemed.
Entry for this one is:
DR Advertising
CR Gift Card Liability
A gift card that is sold rather than given away would have the DR be the bank, of course.
When the gift card is used is when the sale is recorded
DR Gift Card Liability
CR GST/ HST Collected
CR Sales
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The fact that it may never be used is why it is not recorded as a sale. It is a liability (the store must honour it when redeemed)
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