Does Your Restaurant Issue Incentive Cards?

Around the holidays, many companies try to entice customers to purchase gift cards. They often include incentives such as “Buy $25, get $5” or “Buy $100, get $25.”

If your restaurant holds these promotions or is considering it, do you issue paper gift cards – not activated through the point-of-sale system? If so, treat it like a normal coupon.

If you activate the gift card through the POS system, you must ensure the incentive is properly accounted for.

Let’s assume a restaurant runs a promotion whereby a customer receives a $25 incentive in the form of a gift card with the purchase of at least $100 in gift cards. First and foremost, the $25 incentive must be tracked separately from the $100 gift card purchase.

Once the purchase has been made, move on to the first entry:
Cash  $100 
Gift card liability contra 25 
Gift card liability  125

Note that a contra liability account is used to adjust the gift card value to the cash purchase. No expense is recognized upon activation of the $25 incentive gift card.

When the $125 is redeemed, the sale will be recorded for the entire amount. However, a discount must be recognized to reflect revenue as the cash received. This is when the expense is recognized for the $25 incentive:
Gift card liability  $125 
Discount 25
Gift card liability contra 25
Sales 125

As with other gift cards, depending on the escheatment laws of the state, the company may be able to recognize breakage for the unredeemed portion (up to the amount of cash received) once it is determined the gift card will most likely not be redeemed based on historical trends. If we assume none of the gift cards were redeemed, the following entry would remove the liability and recognize the breakage at the cash value:
Gift card liability $125
Gift card liability contra 25
Sales 100

Are you accounting for your incentive cards correctly? Contact us for help ensuring accuracy.