Gift cards- why can't companies consider the purchase of one a profit until it is redeemed?

Question

I know that if you buy a gift card, the store u buy it from cant record that as profit until the cutomer comes back and uses the card. Does anyone- maybe business major or accounting major!- have any clue why!!!

Answer 1

when you buy a GIFT CARD, you are exchanging CASH for PLASTIC MONEY. You have NOT purchased any MERCHANDISE OR SERVICES because that card still has the same PURCHASE VALUE as the cash did. Once you USE the card, then the purchase is recorded. If they recorded the buying of the gift card as purchase, AND again when it was used for goods or services, they would be counting the SAME DOLLARS TWICE.

Answer 2

Until the gift card/gift certificate is redeemed, it is a liability - meaning it is money they owe. Once the gift card is redeemed then the money becomes revenue. But it does not become profit automatically. It is only profit if there is anything left after deducting expenses.

This is the reason many companies will start deducting a maintenance charge from the gift card balance after 12 months. Otherwise they would be required to maintain the liability on their books indefinitely. Although some states will require unredeemed gift card money be turned over to the state as unclaimed property after some period of time. And I do believe Generally Accepted Accounting principles allow for some portion of the gift card balance to be charged off as unredeemed after a period of time. I work for a business that sells lots of gift certificates and I know that about 10-15% are never redeemed.

Answer 3

Certainly - it is pure logic. Different items in the store have different profit margins. Therefor until the customer redeems the certificate, the issuer does not know the wholesale value of the product involved. You cannot count the face value of the certificate as profit because it represents a deposit of funds in advance of a purchase. Those funds are in reserve

Answer 4

because it's considered an unearned income. they have not exchanged something for that gift card. in the accounting world, it's actually a liability to have unearned income. they've received money for something they have not delivered on. i hope this answer helps.

Answer 5

Until the card is redeemed, it is a liability.