For many restaurants, the holiday season bustles with promotions, parties and gift card sales. But amid the season's cheer, restaurants must account for these gift cards properly or end up paying some serious consequences.
Imagine a restaurant running a deal promising customers who purchase $50 gifts an additional $10 free. Before presenting this deal to customers, the business must decide whether this will be a paper coupon or a POS-activated gift card. If the promotion is paper, then the deal can be treated like a coupon. However, if a gift card is activated through the POS system, additional tracking and monitoring steps ensue.
The restaurant must track the $50 gift card and the $10 incentive so the $50 is labeled cash, the $10 is gift card liability contra account, and the sum of $60 is noted as gift card liability. Note that a contra- liability account is used to adjust the gift card value to the cash purchase. No expense is recognized upon activation of the $10 incentive. If the $60 is redeemed in its entirety, the sale should be recorded for the entire amount, recognizing a discount for the incentive of $10 from the actual revenue recognized of $60.
If only part of the balance is spent, it's important to continue to track the gift card for breakage. Then, the restaurant may be able to recognize the remaining amount as income, according to escheatment laws in that state. If none of the card is spent, then the restaurant should evaluate whether the unused balance of $50 should be recognized as income, also following appropriate escheatment laws.
Similarly, tracking incentives for gift card promotions offered from the restaurant itself through third-party retailers must be closely monitored. For example, if a restaurant inked a deal with a retailer so the store buys the cards in bulk and then resells, the tracking does not end after that initial bulk sale.
Consider a scenario where a restaurant runs a promotion with Costco, where the retailer purchases a $100 gift card for $69. Costco will then sell the gift card for $80, essentially providing a $20 incentive. The restaurant must ensure these cards are tracked separately from other gift card purchases through a separate sequence of gift cards. If not, it will be nearly impossible to properly track and record the transactions.
When the gift card is redeemed at the restaurant, it should be recorded as a sale for the entire amount. However, a discount must be recognized to reflect revenue as cash received, since it was received earlier from Costco, while the discount expense should be recognized at the time of redemption. Similar to the incentive given to the Costco gift card buyer discussed above, a best practice is to recognize a contra-liability account for the difference between the face value of the card and the amount paid by Costco when initially sold.
In addition to the jolly spirit these promotions may inspire, accounting for incentives like these can be challenging to navigate, especially without the correct structure in place to properly track the gift cards. That's why before offering these types of promotions, restaurants should have have an established and appropriate tracking system already in place to monitor these cards for proper accounting.
Otherwise, it's possible that the consequences could ultimately counter all the benefits realized. For instance, failing to properly recognize income from breakage, escheating gift card balances and general loss of accountability with your gift card provider all could weigh heavy on your bottom line. That's why it's always a good idea to think well ahead of any gift card incentive programs or bulk sales of gift cards to a retailer because an accounting consultation ahead of time can go a long way in setting your business up for success in the new year.
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/ Dustin co-leads BDO's Restaurant Practice, and serves as an advisor to restaurant companies across the U.S. His clients include many of the nation's fastest growing and most well-respected brands.