If someone buys a $100 gift card from Target, does this $100 debt stay on their books until the card is redeemed, or do they have an algorithm that slowly depreciates this debt over time? Companies benefit from selling gift cards by assuming many will be lost/never redeemed, how do they know when they’ve achieved profit from these sales?
Assuming the gift cards have no expiration date, which many today don’t.
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Generally the process is to record “outstanding gift card balance” as a separate account. When your company sells a $100 gift card, you *don’t* record that as a $100 sale, but as a $100 credit to the gift card balance. When the card is partially redeemed for a $20 shirt, you record that as a normal $20 sale and a debit from the gift card balance.
Unused gift cards can be recorded as revenue; large businesses like Target in particular will have a very very good idea of what percentage of gift cards will go unused, and can then record this as a revenue stream known as “gift card breakage.” This can be a significant revenue stream, and thus they really want to try to include it as an accounting line item, even if it’s not perfectly accurate.
An important exception is **escheatment law**. In US state-level law, unclaimed money (e.g. bank accounts, unpaid wages, and gift cards) is considered abandoned property, and must be surrendered to the state rather than kept by someone who does not own it. The customer owns the imaginary “bank account” of the gift card balance, *not* the store. If the customer abandons that account, the store doesn’t get it – they don’t own it! Instead it goes to public ownership, i.e. the state. Many states exempt gift cards from escheatment, or partially exempt them so only some must be paid to the state. Escheatment is generally included as a percentage loss of the “breakage” profits from unredeemed gift cards.
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