Posting gift certificates to the general ledger

Discussion in 'Small Business Helper' started by Unreg-221, Mar 11, 2005.

  1. Unreg-221

    Unreg-221 Guest

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    I was wondering, in the restaurant biz, you sometimes have gift certificates that take away from sales. I was wondering, when posting journal entries for those sales, how does one post gift certificates? Is there going to be one line item for the amount of GC redeemed, or two line items- one debiting sales and one crediting GC acccount? I was looking for the logistics of it. Any help is good help. Thanks so much....
     
  2. tsbhelper

    tsbhelper Small Business Helper Forum Moderator

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    Unknown Person,

    When you sell someone a gift certificate, the proper accounting transaction to make is to debit cash (increasing an asset) and credit gift certificates outstanding (increasing a liability).

    When someone redeems a gift certificate, you debit gift certificates (decreasing a liability) and credit sales (increasing income).

    If a gift certificate redemption is only part of the sale, the credit to sales is balanced by two debits, one to cash, and the other to gift certificates.

    The Small Business Helper
     
  3. tsbhelper

    tsbhelper Small Business Helper Forum Moderator

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    Further, the classification of the Gift Certificates account(s) may vary, depending on whether you have elected to use the Cash method, or Accrual method of accounting.

    Also, the IRS has some funny ideas about what you can classify as income, and what you can classify as a liability. Not sure whether gift certificates fall under their rules or not, but if they do, you have to record Gift Certificates as income when you sell them (not a liability), and as an expense when they are redeemed.

    This means that you actually have two different Gift Certificate accounts in your books, one for Gift Certificate Sales Income, and one for Gift Certificate Redemption Expense.

    Then the accounting entries are as follows:

    Sell a gift certificate, debit to Cash (increase asset), credit to Gift Certificate Sales Income (increase income).

    Gift certificate redeemed, debit to Gift Certificate Redemption Expense (increase expense) and credit to Merchandise Sales (increase income).

    This is also the way you have to handle it if you have elected the Cash Method of accounting for your books.

    The Small Business Helper
     
  4. Unreg-225

    Unreg-225 Guest

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    Thanks a lot! It really helped understand the process better. I guess even if you know what youre doing, there are still variables on how you want to go about posting them. Thanks again!

    Oh yeah, what if the purchase is less than the GC amount, and they get cash back, do we DR G.C. for the amount purchased, then for the cash we credit cash that they are getting back, and have a cr and dr to sales? One for the amount they bought, but then one to offset the amount they originally spent on the GC when they bought it?
     
  5. tsbhelper

    tsbhelper Small Business Helper Forum Moderator

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    Yes.

    Accounting entries for redemption of gift certificate involving sale which involves cash back:

    Debit to Gift Certificate expense (increase expense), Credit to Sales for amount of sale (increase income), Credit to Cash for amount of cash back (decrease asset).

    Not absolutely necessary to double entry sales for certificate increase and cash back out decrease, entry to Sales may be for only the actual amount of the sale. Only reason to do this would be if you were concerned with tracking abuses of Gift Certificate redemptions for large amounts of cash back vs. actual merchandise sales.

    The Small Business Helper
     

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