Question

Gift cards are popular with marketing executives, but they create accounting questions. Should revenue be recorded at the time the gift card is sold, or when it is used by the customer?

Suppose a customer purchases a $100 gift card at Best Buy on December 24, 2019, and gives it to his wife on December 25, 2019. On January 3, 2020, the customer’s wife uses the card to purchase CDs. When do you think Best Buy should recognize revenue, and why?

Answer 1

Revenue is to be recorded at the time when the services are performed or the goods are sold. In the case of gift cards, the revenue will be recorded when the gift cards are used by the customer.

At the time when the gift card is sold, Cash a/c is debited with the amount received and deferred revenue a/c is credited for the respective amount while no revenue is recorded at this point. Then, as the customer will use the gift card, the revenue is recorded by the entity.

Best Buy will record the following entries:

Date	Account Title	Debit	Credit
24-Dec-19	Cash	$100
	Deferred Revenue		$100
	(Being deferred revenue recorded for gift certificate sold worth $100)
Date	Account Title	Debit	Credit
03-Jan-20	Deferred Revenue	$100
	Service Revenue		$100
	(Being revenue recorded for a gift certificate worth $100 redeemed)

On December 24, 2019, the gift card was sold against which the CDs have actually been sold on January 3, 2020, hence revenue is recognised on January 3, 2020. The date of December 25, 2019 is irrelevant.