Gift Cert Income Question

[Greshnab]

I am wondering how everyone deals with Gift Certificates. Here is an example to help explain what I am talking about.

Joe buys a 1 hr GC for Lisa on 11.10.09, pays $55 check.
Lisa redeems GC on 1.10.2010.

Do you pay yourself/business that $55 in November and then nothing in January? Or do you set that money aside until the person uses the Gift Certificate? and if you do method 2, what do you do if the GC never gets redeemed?

Just curious how everyone does this and maybe some insight on how you deal with it since in my example it was purchased in 2009 and was used in 2010 - is it 2009 income or 2010 income? Currently I just deposit the money the month it was purchased and don't do anything when it is redeemed (as far as the money goes). But then I feel like I am giving a free massage, which I know I am not but ... know what I mean? Just trying to get some ideas before the holiday GC purchases start coming. Any input?

 

[KandyGirl16]

Gift Cert Income Question

GAAP - Generally Accepted Accounting Principles - states that you can only recognize INCOME in the period in which it is earned.

You don't EARN anything for a massage until the massage takes place.

YOu collect the cash -- which increases your bank account (this is on your balance sheet, not your income statement) but since your balance sheet needs to balance, you also register a liability for the amount of the GC. YOu have sold the promise of a service, not the service.

When you realize the promise and deliver the service, you move the cash off your balance sheet and record the sale, decrease the liability you created and then register the cost of doing the service (in case you sub it out to and IC, renter or employee) and what is left is the profit on our income statement.

 

[SCyy S]

Gift Cert Income Question

It's really important to set aside that gc money and pay yourself when the client comes in. I don't report it on my taxes until the client comes in to use it, otherwise there's the chance it will get reported twice, after they come in for the service. The problem with not setting aside that money is eventually you can have an entire week or two of all gc's and if you haven't set that aside, then you will have nothing as far as income. Just about all my gc's are redeemed so I wouldn't know what to do with one that wasn't, but that's a good question.

 

[Lilly]

Gift Cert Income Question

I am selling GC online. Should I charge for shipping? Right now I am not. I am just thinking for the holidays stamps can ad up pretty quick

 

[Bertie]

Gift Cert Income Question

When I had "ship it" as an option, I charged $1.00 for "shipping & handling". Sheesh, the stamp alone is $0.42! and then there's the mailing envelope. I recently took "ship it" off as an option, because the purchaser has the option of printing or emailing it. If they want it MAILED to the recipient, they can print & mail it! I have enough to do before the holidays. ;~)

 

[Mirah]

Gift Cert Income Question

It appears "big brother" has made some new rules regarding gift certs. to take effect in September. (Rant; "It seems I'll soon have no personal choice/decision/freedom!" end rant.)

 

[~JYP <3 Gail Kim]

Gift Cert Income Question

It appears "big brother" has made some new rules regarding gift certs. to take effect in September. (Rant; "It seems I'll soon have no personal choice/decision/freedom!" end rant.)

What are the new rules, and where did you find them?

 

[Jen]

Gift Cert Income Question

GAAP - Generally Accepted Accounting Principles - states that you can only recognize INCOME in the period in which it is earned.

You don't EARN anything for a massage until the massage takes place.

YOu collect the cash -- which increases your bank account (this is on your balance sheet, not your income statement) but since your balance sheet needs to balance, you also register a liability for the amount of the GC. YOu have sold the promise of a service, not the service.

When you realize the promise and deliver the service, you move the cash off your balance sheet and record the sale, decrease the liability you created and then register the cost of doing the service (in case you sub it out to and IC, renter or employee) and what is left is the profit on our income statement.

Ok, so I've been wrestling with this issue as well.

R&R, you said that we're supposed to go ahead and deposit the money paid for the gift certificate into the bank, but it doesn't "count" until the GC is redeemed. Is it ok to USE that money, or should we set it *completely* aside- like maybe even have a separate bank account for it, and when the GC is redeemed, actually transfer the funds to the "main" account (I know that is over-complicated, but sometimes I think it is easier for me, personally, to keep "designated funds" out of sight, especially when we're scraping to pay bills, so it doesn't get used when it isn't supposed to.).

When do we report that money on our taxes- when the GC is sold, or when it is redeemed?

And I reiterate one of the op's questions: what if the GC is never redeemed? Say I have an account just for GC revenue, and I deposit money for GC sales into it and take it out when they are redeemed, and when I look at my list of GC sold and redeemed over the course of the year, there are some that have never been redeemed, in the whole year? OR two years later? Or...??? I'll accept a GC a year or two later, or whatever, but am I really supposed to not ever touch that money until/unless the GC is redeemed? I *know* there are going to be lost/unredeemed GC's on our books "forever". How to account for those?

 

[New T]

Gift Cert Income Question

R&R, you said that we're supposed to go ahead and deposit the money paid for the gift certificate into the bank,

You can't keep it in your sock drawer!

but it doesn't "count" until the GC is redeemed.

Does not count as a service sold until the service is performed. In many states, GCs either have no expiration, or if they do "expire" you have to turn them over to the state as "unclaimed property"

Is it ok to USE that money, or should we set it *completely* aside- like maybe even have a separate bank account for it, and when the GC is redeemed, actually transfer the funds to the "main" account (I know that is over-complicated, but sometimes I think it is easier for me, personally, to keep "designated funds" out of sight, especially when we're scraping to pay bills, so it doesn't get used when it isn't supposed to.

Use it however you see fit. Think of it as a loan from a customer, who eventually will want it back, but in the form of a massage. If you took a loan from the bank, you don't just sit on the money and pay it back. You use the money and pay it back when the time comes. Unlike the bank, a GC holder does not want interest!

When do we report that money on our taxes- when the GC is sold, or when it is redeemed?.

When it is redeemed. Until then, it is still a "loan" which is not an income producing event.

And I reiterate one of the op's questions: what if the GC is never redeemed?

Depends on your state laws. It can stay on your books in perpetuity as an outstanding liability. If your state allows expiration dates, when the GC expires you can book it as a service sold, with no cost attached -- aka 100% profit.

Say I have an account just for GC revenue, and I deposit money for GC sales into it and take it out when they are redeemed, and when I look at my list of GC sold and redeemed over the course of the year, there are some that have never been redeemed, in the whole year? OR two years later? Or...??? I'll accept a GC a year or two later, or whatever, but am I really supposed to not ever touch that money until/unless the GC is redeemed? I *know* there are going to be lost/unredeemed GC's on our books "forever". How to account for those?

You should not have a bank account for these, just a line in your balance sheet for them. There will be some never redeemed. It is the nature of the best. Use the $$ you collect as you see fit -- just be sure you can cover the cost of the redemption -- which is $0 so long as you are providing the services, not using an employeer or SubtContractor.

 

[forumComrad]

Gift Cert Income Question

If you just let the outstanding liability for unredeemed GCs remain on your balance sheet, it will grow over time. This is fine if you never intend to sell your practice or get a loan whose application process may be impacted by your business balance sheet.

On the other hand, a large outstanding GC liability can present problems when selling a practice or obtaining financing. The larger the outstanding liability relative to your business income, the more of a concern it is likely to be. To prevent these problems, our accountants claim a portion of our outstanding GC liability as income each month, even if it wasn't redeemed. In months where we have a high level of GC redemptions, we may have them hold off on claiming that GC income until it is more appropriate to claim it again.

 

[Tracy Max]

Gift Cert Income Question

If you just let the outstanding liability for unredeemed GCs remain on your balance sheet, it will grow over time.

This does not make sense, precisely for the reasons you cite it makes sense to claim some of the income.

A balance sheet has to be in balance.

If liabilities increase, then either assets have to increase or owner's equity has to decrease to keep it in balance.

When a GC is sold, liability increases, but so does cash on the asset side of the ledger. When you apply for a loan, you will be judged on your net assets = Assets - Liabilities. IN this case 1 GC or 1000 GCs has the same impact on your net assets

If you use the cash from GCs to buy a new massage table, you are just moving the type of asset that offsets the liability.

If you claim some of the income but have no associated expense (pure profit) then you are reducing the liability but increasing Owners Equity by the same amount, thus keeping your balance sheet in balance.

It sounds like your acct is just making busy work for everyone by recognizing a portion of revenue each month and then having to reconcile it against actual redemptions.