6 Ways Gift Cards and Loyalty Points Hide a Liability on Your Books
Sam's List Editorial | 2026-08-12
December looks incredible. You sold $60,000 in gift cards in three weeks and the bank account agrees.
Then February arrives, revenue looks terrible, margins look worse, and nobody can explain why. Nothing went wrong in February. What went wrong is that gift card accounting treated a customer's deposit as a sale, and the cost of actually delivering that sale showed up two months later with no revenue attached to it.
Here are the six places this breaks, and what each one does to your numbers.
1. Booking the Gift Card Sale as Revenue
A sold gift card is not revenue. It is cash you have collected for goods you have not delivered yet, which makes it a contract liability on the balance sheet. Revenue is recognized when the card is redeemed and you actually hand over the product or the meal.
The distortion runs in both directions. Your strongest selling month is overstated, and every month afterward is understated as those cards get redeemed against no recorded revenue. If you are managing to monthly revenue targets, or if a lender is reading your trailing twelve months, this is not a cosmetic issue.
The fix is a single liability account and a redemption entry. The limitation is discipline: it only works if your point of sale actually distinguishes a card sale from a card redemption, and plenty of systems make that harder than it should be.
2. Treating Breakage as Free Money
Breakage is the portion of gift card value that will never be redeemed. It is real, and it is real revenue eventually. What it is not is a number you get to pick.
Under ASC 606, when an entity expects to be entitled to a breakage amount, it recognizes that amount as revenue in proportion to the pattern of rights exercised by the customer. In plain terms, you recognize breakage as customers redeem, not in a lump at year-end, and only if you have a reasonable basis to estimate it. If you cannot estimate it, you wait until the likelihood of redemption becomes remote.
The trap is a new program. A business with eighteen months of history does not have redemption data credible enough to support an estimate, and recognizing breakage anyway is an aggressive position that an auditor or a buyer's diligence team will find.
3. Ignoring That Loyalty Points Are a Separate Promise
A loyalty program that gives customers something they would not otherwise get creates what ASC 606 calls a material right. That right is a separate performance obligation, and a portion of the original transaction price has to be allocated to it based on relative standalone selling price.
Practically: when a customer spends $100 and earns points worth $5 toward a future purchase, you did not earn $100 today. You earned something less, and the rest sits as a liability until those points are used or expire.
Most small operators book the full $100 and expense the reward later as a discount. That overstates revenue in the earning period and understates margin in the redemption period, and it makes any same-store comparison across a program launch meaningless.
4. Assuming Unredeemed Balances Are Yours to Keep
Even when a balance is dead for accounting purposes, it may not be dead legally. Many states treat unredeemed gift card balances as unclaimed property subject to escheat, meaning the balance is eventually turned over to the state rather than kept.
The rules vary considerably. Some states exempt gift cards entirely, some exempt only cards with no expiration date or fees, some apply a dormancy period of three to five years, and the applicable state is often determined by the address of the holder rather than where your store is. Federal law separately restricts expiration dates and dormancy fees on most gift certificates and store gift cards.
This is the item most likely to be genuinely wrong in a small business, and it is state-specific enough that a general rule is worse than useless. If you sell cards across state lines, this needs a real answer, not a guess.
5. Cash In and Cost Out Landing in Different Periods
Set aside the accounting rules for a second and look at the cash. You collect $60,000 in December and spend nothing to fulfill it. You fulfill $40,000 of it in the first quarter, buying inventory and paying labor against revenue you already banked.
If you read your P&L without a gift card liability account, Q1 looks like a margin collapse. If you read your cash balance without one, December looks like you can afford a hire.
Tracking the liability is what keeps you from making a staffing or purchasing decision on money you already owe in product. The trade-off is that it makes December look less exciting, which is genuinely unwelcome news at the time.
6. Never Reconciling the POS Gift Card Balance to the General Ledger
Your point of sale knows the outstanding card balance. Your general ledger has a gift card liability account. These two numbers should match, and in most small businesses they have never been compared.
Gaps come from manual card issues, comped cards handed out by managers, promotional cards that were never separated from sold cards, refunds issued to a card, and card balances migrated during a POS change. Each one is small. Together they can run to five figures.
Add this to the monthly close as a two-line reconciliation. Investigating a variance you find three years later costs far more than catching it in the month it happened.
When Gift Card Accounting Is Worth Bringing to a Professional
A gift card program under a few thousand dollars a year is a cleanup task. A program running six figures, spanning multiple states, or paired with a loyalty tier is a structural accounting question that touches revenue recognition, state unclaimed property law, and your monthly close.
Steady Co is a Vineyard, Utah firm founded in 2024 that provides accounting, tax, and fractional CFO work for small business owners, real estate investors, and solopreneurs. Programs like these sit exactly where bookkeeping ends and CFO-level judgment begins, because the question is not only how to record it but what it means for your reporting.
Steady Co has 13 verified client reviews on Sam's List as of 2026-06-26. Reviews reflect the experiences of individual clients, do not represent an endorsement by Sam's List, and are not indicative of future results.
No firm can make a breakage estimate defensible without redemption history to support it, and correcting prior-period revenue recognition can require restating figures you have already given a lender or a partner. Ask about that exposure up front rather than after the cleanup starts.
You can compare firms by specialty and verified reviews in the Sam's List accountant directory.
Frequently Asked Questions
Is a gift card sale considered revenue? No. When you sell a gift card you have collected cash for goods or services you have not yet delivered, so it is recorded as a contract liability. Revenue is recognized when the card is redeemed, or over time as breakage is recognized in proportion to the pattern of customer redemptions.
What is gift card breakage? Breakage is the portion of gift card value that customers never redeem. Under ASC 606 it is recognized as revenue in proportion to the pattern of rights exercised, provided you can reasonably estimate it. Without sufficient redemption history, you wait until the likelihood of redemption becomes remote.
How should a small business account for loyalty points? A loyalty reward that gives customers a material right is treated as a separate performance obligation. A portion of each transaction price is allocated to the points based on relative standalone selling price and held as a liability until the points are redeemed or expire.
Do unused gift card balances have to be turned over to the state? In many states, yes. Unredeemed balances can be subject to unclaimed property escheat after a dormancy period, though several states exempt gift cards under certain conditions. The rules differ by state and often follow the holder's address, so multi-state sellers should get state-specific advice.
About the author: Kimberly Green is the cofounder of Sam's List, where business owners and high earners find vetted CPAs, financial advisors, and fractional CFOs. She's met one-on-one with 400+ financial professionals and writes from the real data behind thousands of client-advisor matches. Ask her anything about finding an accountant - she's heard it all, including the questions people are afraid to ask.