Gift card accounting for restaurants comes with a lot of questions.
How do you properly recognize revenue from gift card sales? What happens when they’re redeemed or unredeemed? How do we record promotional accounts?
These questions keep restaurant operators up at night—and for good reason.
Get gift card accounting wrong, and you’re looking at compliance issues, cash flow problems, or surprise tax bills that could’ve been avoided.
Let’s take a look at how to get it right.
Key Takeaways
- Gift cards create deferred revenue liabilities on your balance sheet, not immediate income—revenue is only recognized when cards are redeemed or breakage is determined under ASC 606
- Proper journal entries require recording cash and gift card liability at sale, then reducing liability and recognizing revenue at redemption, with sales tax applied only at redemption
- Restaurant breakage rates typically range from 10-15% and must be recognized proportionally as redemptions occur using historical data, not when redemption becomes “remote”
- Thirty-seven states exempt gift cards from escheatment, but remaining jurisdictions require unredeemed balances be reported to the state after 2-5 years of dormancy—know your state of incorporation’s rules
- Franchise gift card accounting requires tracking centralized vs. decentralized systems, cross-location redemptions, and how gift card transactions affect franchise royalty calculations
What Makes Gift Card Revenue Recognition So Important?
When a customer hands you $100 for a gift card, that’s not revenue. Not yet, anyway. It’s a liability—an IOU sitting on your balance sheet until someone walks in and orders that burger or pasta dish.
Restaurant gift cards represent a significant revenue stream for the industry. 30% of all gift card sales in the food and beverage sector go to restaurants, and during the 2024 Thanksgiving weekend, restaurant gift card purchases jumped 17.7% compared to 2023. With numbers like that, proper accounting isn’t optional—it’s essential.
Why this matters for your operation:
- ASC 606 compliance: The Financial Accounting Standards Board’s revenue recognition standard (ASC 606) dictates exactly when and how you recognize gift card revenue. Treating gift card sales as immediate income creates serious financial reporting problems and potential audit issues.
- Cash vs. revenue timing: You get the cash immediately when the card sells, which helps working capital. But you can’t recognize that as revenue until the card gets redeemed—or until you determine it never will be.
- Breakage rates drive recognition: Breakage rates for restaurants often reach 10-15%, meaning a portion of your gift cards will never get redeemed. Understanding your breakage rate is critical for accurate revenue recognition under current accounting standards.
- Tax implications: The IRS doesn’t consider gift card sales as taxable income until redemption occurs. Mishandling this creates tax compliance issues and potentially overpaying taxes on money you haven’t actually earned yet.
The basic principle hasn’t changed—gift cards have always been liabilities, not immediate revenue. But ASC 606 did change how we handle breakage.
Before 2018, you could wait years until redemption was ‘remote’ to recognize breakage revenue. Now you must recognize breakage proportionally as cards get redeemed, which means dealing with breakage calculations much earlier and more frequently.
The Essential Gift Card Accounting Entries To Know
Getting your journal entries right from day one prevents headaches down the road. Let’s walk through each scenario you’ll encounter with your gift card program.
Initial Sale
When a customer purchases a $50 gift card, you’re receiving cash but not providing goods or services yet. Here’s how to record it:
Debit: Cash $50
Credit: Gift Card Liability $50
This creates a liability account on your balance sheet. You owe the customer $50 worth of food and beverages at some point in the future. This entry stays on your books until redemption occurs. The cash improves your working capital immediately, but your P&L doesn’t see any revenue yet.
Redemption
When that gift card holder comes in and orders a $30 meal, you’re finally providing the goods. Here’s the entry:
Debit: Gift Card Liability $30
Credit: Revenue $30
You’ve satisfied your obligation by delivering the food, so you reduce the liability and recognize the revenue. The remaining $20 stays on the books as a liability until it gets redeemed or you recognize it as breakage. Sales tax gets calculated on the $30 transaction at redemption, not at the initial gift card sale.
Partial Redemption
Most gift cards don’t get used in one transaction. When someone uses part of their balance, you track it the same way as a full redemption—just for the amount actually used. If they spend $15 from that $50 card:
Debit: Gift Card Liability $15
Credit: Revenue $15
Your POS system should automatically track the remaining $35 balance. Accurate tracking of partial redemptions is critical because you need this data to calculate your breakage rate and comply with escheatment laws in your state.
Breakage / Gift Cards That Won’t Be Redeemed
Redemption rates typically peak in the first or second year after purchase, then decrease significantly with each passing year. Eventually, some cards will never get redeemed. Under ASC 606, you recognize this breakage revenue proportionally as other cards are redeemed.
Let’s say you sold $100,000 in gift cards this year, and your historical data shows a 10% breakage rate. When customers redeem $20,000 in gift cards, you’d also recognize breakage:
Debit: Gift Card Liability $2,000
Credit: Breakage Revenue $2,000
The calculation: $20,000 redeemed × 10% breakage rate = $2,000 breakage revenue.
This proportionate method accelerated breakage recognition compared to the old “wait until it’s remote” approach. You’re recognizing small amounts of breakage revenue throughout the gift card’s life cycle rather than waiting years to write it off.
Franchise Gift Card Accounting
Franchise operators face additional complexity with gift card accounting. When you’re part of a franchise system, gift cards often work across multiple locations—which means tracking where cards were sold versus where they’re redeemed.
Key considerations:
- Centralized vs. decentralized systems: Many franchisors run centralized gift card programs where they hold the liability and allocate redemptions back to individual franchisees. This affects how you record the liability and whether it appears on your books or the franchisor’s.
- Cross-location redemptions: When a customer buys a card at Location A but redeems it at Location B, you need systems to track and settle these transactions between franchisees. The liability moves from one operator to another.
- Royalty calculations: Gift card sales and redemptions can affect franchise royalty payments. Some franchise agreements include gift card revenue in gross sales for royalty purposes, while others exclude them until redemption.
Gift Card Accounting Rules Every Restaurant Must Follow
Getting compliant with gift card accounting rules protects your business from penalties and keeps your financial statements accurate. Here’s what you need to know:
GAAP Standards (ASC 606)
Here are a few important reminders for ASC 606:
- Gift cards create deferred revenue liabilities, not immediate income
- Revenue recognition occurs only upon redemption or when breakage is determined
- Breakage must be recognized proportionally as redemptions occur, not when it becomes “remote”
- Historical redemption data must support your breakage rate calculations
State Escheatment Laws
Thirty-seven states expressly exempt gift cards from escheatment or don’t require it, but the remaining jurisdictions do require you to turn over unredeemed balances to the state after a dormancy period (typically 2-5 years).
Idaho changed its law in 2024, creating an exemption for gift cards without expiration dates or fees. You must know your state of incorporation’s rules and track where cards were purchased if that information is available.
Sales Tax Considerations
Some tips about sales tax operators won’t want to forget:
- Sales tax typically isn’t collected when the gift card sells
- Tax gets calculated and collected at redemption, based on the actual items purchased
- Your POS system needs to properly handle sales tax on gift card transactions
Financial Reporting Requirements
It’s super important that gift card liabilities be clearly disclosed on your balance sheet. If there are any changes in estimates (like breakage rates), you need proper documentation. Also, promotional gift cards and bulk sales may require separate tracking
I’ve seen restaurant operators get hit with unexpected escheatment obligations because they didn’t realize their state required reporting unredeemed balances. Others have faced audit issues because they couldn’t support their breakage rate calculations with actual historical data. Following these rules from the start keeps you out of trouble.
Tax Implications and Strategic Planning for Gift Card Programs
Gift card accounting directly impacts your tax position. Understanding the timing and treatment of gift card transactions helps you plan more effectively and avoid surprise tax bills.
Timing of income recognition: For federal tax purposes, accrual-method taxpayers can sometimes defer gift card income recognition from the year of sale into the subsequent tax year under IRC Section 451(c). This limited deferral opportunity requires proper tracking and documentation.
Breakage income taxation: When you recognize breakage revenue on your books, that becomes taxable income. Your 10% breakage rate on $100,000 in annual gift card sales means $10,000 in additional taxable income as those cards get redeemed and breakage is recognized proportionally.
Sales tax collection timing: Sales tax is generally not collected at gift card sale but rather when the card is redeemed for taxable goods or services. This creates tracking obligations to ensure proper sales tax remittance at redemption.
Year-end planning: Smart operators review gift card liabilities before year-end. Understanding your outstanding balances, redemption patterns, and breakage estimates helps you forecast tax obligations and plan accordingly. Fourth quarter is peak gift card season, so planning ahead prevents cash flow surprises when tax bills come due.
Partner With Specialists Who Understand Restaurant Gift Card Accounting
Gift card accounting combines multiple complex areas: ASC 606 revenue recognition, state-specific escheatment laws, sales tax regulations, and industry-specific redemption patterns.
Getting it right requires specialized knowledge of both accounting standards and restaurant operations. Our accounting alliance is full of CPAs who understand restaurant gift card programs inside and out—from initial setup through year-end reporting and tax planning.
Stop guessing about gift card accounting and start working with specialists who know exactly how to handle it. Get matched with a restaurant accounting expert who can set up your systems right and keep you compliant as your gift card program grows.
