Gift cards are amazing items for retail and e-commerce sellers because it's an easy sale during the holiday season and can be good marketing for your store.
But keeping track of them properly is not always so well understood.
A gift card is not a product and therefore It cannot be "sold". But most software systems, engineers, and even accountants talk about "gift cards sold" which leads to confusion in accounting and often mistakes in software development.
Issuing Gift Cards:
We like to talk about "gift cards issued" which is a gift card being received in exchange for a tender of cash, credit card or other. Most e-commerce and point of sales systems will consider this a sale or purchase.
Take an example of a customer purchasing a $20 gift card in exchange for $20 on a credit card transaction.
In this transaction the retailer now has received funds and has a liability to the customer. This means the retailer owes the customer $20 but gets to keep the $20 (minus credit card processing fees).
Note that since a gift card is not a product you do not collect sales
tax on the transaction. Be sure your point of sale system or
e-commerce platform is not charging sales tax on Gift Cards.
Gift Card Tendered:
Then when we talk about "gift card tendered" that is the exchange of product for a reduction in the liability of the gift card.
Continuing with our example above the customer who has the $20 gift card now comes in to purchase a coffee for $4.00 with $0.36 in sales tax and $1.00 in tip.
The customer uses the gift card to pay. So now the gift card that used to have a $20 balance now has a balance of $14.64 and our Gift Card Tendered bucket is $4.36.
At the end of the day we reduce the total gift card liability due to all customers by $4.36 and increase our sales by $4.00 and increase our liability owed to the sales tax people by $0.36 and the liability owed to our staff by $1.00.